At the beginning of 2022, Greggs (LSE: GRG) shares were riding the crest of a wave. The share price had been rising for years, up 150% during the pandemic alone. I researched the stock around this time, wondering whether to get in on the action of one of the London Stock Exchange‘s hottest growth stocks.
In the end, I opted against buying. And what a good decision that turned out to be! Had I bought at the top, I’d have been staring down the barrel of a 51% loss by this point. A £5,000 stake would have cratered down to £2,431 (excluding a few smallish dividends).
I know there was plenty to like about Greggs back then, before the big fall. Is there still plenty to like now? Are the shares looking cheap at a 50% discount? Is this a golden buying opportunity?
Cheap bakes
What’s so good about Greggs? What makes it worth buying as a stock? If I had to sum it up, I’d say cheap, hearty grub – emphasis on the word ‘cheap’.
Businesses that can undercut competition on price often make very good investments. This was true for the baker, growing to over 2,600 stores selling sausage rolls and pasties below the £1 mark. A familiar refrain I heard from friends was how you could walk in with a fiver and out with a whole lotta food.
Shrewd management lies at the heart of it. The firm doesn’t pay VAT on many products because it only cooks them once rather than reheating them. This little trick saves 20% on certain items. It’s also why sometimes steak bakes are tepidly lukewarm, but also, if straight out of the oven, the same temperature as the surface of the sun.
Rising prices
The problem, as I see it, is the country has an inflation problem. The headline rate of 4% seems scarcely believable compared to how much more food is costing. I’ve seen items jump 20%-30% in the last year. That’s not even getting onto beef or coffee.
Where this impacts Greggs is if it cannot maintain it’s bargain basement image. A quick Google search shows me a sausage, cheese, and bean melt costs nearly £3. Are customers going to be happy with that as a cheap option? The latest news from the company suggests otherwise, with profits down this year on the back of lower footfall.
I will say that the price-to-earnings ratio of just 11 suggests there is scope here for a turnaround. The analysts’ consensus is very good too, with an average price target of 30% in the next year looking attractive. But all in all, there are other opportunities I’m more interested in at present.
