I’ve had my eye on the Greggs (LSE: GRG) share price for literally ages and there’s only been one thing that’s stopped me filling my face.
The nation’s favourite high street bakery chain may be renowned for its bargain-priced steak bakes, sausage rolls, and the like, but its shares have been bloomin’ expensive. However, October has been bumpy for stock markets, and particularly for Greggs shares, which are down 10.24%. Time to tuck in?
FTSE 250-listed Greggs is a textbook example of what savvy management can do when they understand their brand and know how to sell it. They’ve transformed the public view of the company. Many used to sneer at Greggs – especially in affluent areas of the south – but now everybody loves it, or pretends too.
Is this FTSE 250 stock now a bargain buy?
Not as much as investors love it, though. Greggs shares have put in a steaming hot performance for years. If this was a freshly microwaved pasty, you’d let it cool down before sinking your teeth into it.
Greggs shares have jumped 20.03% over the last year, and 58.33% over five. And that probably explains why I haven’t bought them. I thought I was rolling up too late, and would end up buying the shares just as they cooled.
Well now they have. Yet they still don’t look that cheap though, with a price-to-earnings ratio of 22.43. That’s double the average FTSE 250 P/E of 11 times.
Few FTSE 250 stocks have the same visibility, and that worries me. Are investors buying Greggs because they think it’s fun to buy, rather than checking under the crust? That’s fine when buying a pie for a few pounds, not so sensible when investing thousands in a stock.
A price-to-revenue ratio of 1.6 is also a little on the high side, suggesting investors have to pay £1.60 for each £1 of sales today. On the other hand, Greggs does retain healthy growth prospects, as management aims to lift total store numbers from 2,500 to 3,500.
Can it still keep growing?
It’s also breaking new ground by setting up shop in stations, airports, supermarkets, and retail parks, while testing evening openings. Management is also quick to shutter under-performing outlets, to maintain margins.
That said, operating margins are forecast to drop from 10.6% to 9.6%. Which brings me to why the shares have dipped. On 1 October, the board reported a slowdown in Q3 sales growth. Sales rose 10.6%, down from 13.8% across the first half of the year.
The board is standing by full-year guidance and expects to continue driving sales with new openings and innovative products.
The 10 analysts offering one-year share price forecasts remain bullish, setting a median target of 3,338p. If correct, that would mean a rise of just over 20% from today’s 2,760p. Throw in today’s trailing yield of 2.25%, and I’d be happy with that.
Yet I’m wary. I’m worried investors may have had too much fun with Greggs, and the board may struggle to meet their elevated growth expectations. Any further hiccups, and the share price could retreat further. I’ll wait to see what November brings.
