FTSE 250 purveyor of baked foods Greggs (LSE: GRG) has seen its share price rise 5% from 1 October. This uptick will be a welcome relief for shareholders, following a strong bearish trend in the stock this year.
The rise follows a reiteration of its previous full-year guidance in its Q3 results on the day.
Like-for-like (LFL) sales increased 1.5% in Q3 year on year. Although positive, this is down from Q3 2024’s year-on-year increase of 5%.
LFL sales measure a retail business’s growth from its existing stores and space, excluding new store openings or closures.
The company attributed this slide to unusually high temperatures throughout July. The problem with this as an explanation is that the world is continuing to heat up, so what happens next year?
Aside from this, I think a key risk for the business is any further surge in the cost-of-living. This could reduce consumer spending going forward.
What’s the outlook?
On the positive side of the Q3 results, Greggs continues to enhance shopping convenience for its customers. This is being done through new store openings and distribution tie-ups with supermarkets.
On the former, it expects around 120 net shop openings overall this year, with 57 having been opened so far in 2025.
On the latter, its ‘Bake at Home’ range is in 930 Iceland and 820 Tesco stores and on the online sites.
Consequently, despite the declining year-on-year rate of sales growth seen in Q3, Greggs reiterated its previous performance guidance for the full year. This is that 2025’s operating profit will be “moderately lower” than the £195m recorded in 2024.
Having said all of this, the shares are still 43% lower than their 21 October one-year traded high of £29.34.
So, how does the value proposition currently look?
Is there a price-to-valuation gap?
A share’s price is whatever the market will pay for it at any given moment, but its value reflects the true worth of the underlying business fundamentals.
Knowing this and being able to quantify any gap between the two is key to big long-term profits, in my experience. This comprises several years as a senior investment bank trader and 30+ years as a private investor.
The best way I have found of doing this is through the discounted cash flow model. This clearly identifies where any firm’s stock price should trade, based on cash flow forecasts for the underlying business.
In Greggs’ case, it shows the shares are 29% undervalued at their current £16.81 price.
Therefore, their fair value is technically £23.68.
My investment view
Aged over 50 now, I am at the latter part of my investment cycle. This means I do not want to wait around for stocks to recover from any shocks.
In this context, I am not optimistic about the UK’s economic trajectory for several years to come. Specifically, I think there will be further surges in the cost of living and in personal and business taxation. These are likely to hit fast-food sector spending in my view.
Consequently, I will not buy Greggs shares any time soon.
That said, for investors at an earlier part of their investment cycle – and with a more optimistic disposition – I think they are well worth a look.
