It’s fair to say that Greggs (LSE: GRG) shares had a mixed 2024. For much of the year, their value just seemed to keep climbing. But nasty falls in October and November only succeeded in wiping out all those gains.
Fortunately, I sold my position in the FTSE 250-listed food-to-go retailer in the autumn on fears that its valuation was looking a bit frothy for what is actually a pretty simple, albeit high-quality, business.
But I still rate the stock highly. And there are certainly a few reasons to think that 2025 could be a better year for the sausage roll seller.
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So, is now the time for me to buy back in?
Not so tasty
To be clear, the Greggs fall from grace wasn’t due to a cataclysmic wobble in trading. In my view, it was all about market expectations not meeting reality.
During the first half of the year, the company revealed a 14% rise in total sales to nearly £1bn. Profit also rose a little over 16% at £74m. Given these numbers, it was no surprise that the stock price rose.
However, the very same stock was trading at a price-to-earnings (P/E) ratio in the mid-to-high 20s when, at the beginning of October, CEO Roisin Currie and co revealed that underlying sales growth had slowed in Q3. At the time, economic uncertainty, weather and riots (yes, you read that right) were blamed.
This news was never likely to go down well, despite the baker sticking to its outlook for the full year. At that sort of valuation, the market was clearly wanting an upgrade to guidance!
Since then, we’ve seen a slight recovery in the share price. But its still almost 15% below the 52-week high hit back in September.
Better times ahead?
The fairly significant fall in this stock leaves the shares trading at a much-more-palatable forecast P/E of 19 for FY25. That’s still not what most investors would call a bargain. But nor is it ludicrously expensive for a highly profitable business with a vertically integrated supply chain network that boasts a solid brand and devoted following. There’s a secure-looking 2.6% dividend yield as well.
Considering how competitively priced its treats are, there’s also an argument for thinking that Greggs shares could do well if (and that’s an almighty ‘if’) inflation bounces more than expected and the cost-of-living crisis rumbles on.
On the flip side, it’s worth remembering that Greggs faces paying higher National Insurance contributions for its 32,000 staff from April. This will increase annual costs by tens of millions of pounds. Might more investors head for the exits before this kicks in?
Here’s what I’m doing
A Q4 trading update is due next Thursday (9 January). Since buying (or selling) prior to events like this is potentially risky, I’m going to wait until I’ve read and digested that before deciding whether to add the shares to my portfolio again. Signs that the company ended 2024 well, when combined with that lower valuation, could force my hand.
In the meantime, it makes sense for me to keep looking for other opportunities in the market that I wouldn’t be able to take advantage of if I chose to stash my cash in this old favourite.
