Greggs‘ (LSE:GRG) shares are the perfect example of market exuberance getting ahead of a company’s tangible value. The stock surged to all-time highs in 2024, but traded at crazy multiples for a company that makes low-margin baked goods.
Over the past year, the stock’s slumped. It’s currently down 43% over the past 12 months. In other words, someone who invested £20,000 a year ago would now be sitting on just £11,400, although some dividends would have been received during the period.
In short, it would have been a pretty disastrous investment.
However, there are some clear lessons to be learned from such an investment. And it’s about focusing on a company’s valuation rather than following the crowd.
A year ago, Greggs shares traded at 18.9 times forward earnings and had a price-to-earnings-to-growth (PEG) ratio of 2.7. These are not strong metrics. A PEG ratio above one was traditionally a sign of an expensive stock. And accounting for the dividends and net debt, it still doesn’t look appealing.
Any investor considering Greggs shares a year ago should have taken a good looking at the earnings forecasts. These are compiled by analysts, and trust me, analysts can be wrong — but the consensus is normally fairly illuminating.
Estimates for the fiscal 2024 actually showed earnings going into reverse. The forecast for 2025 — which is obviously less accurate as it was another year ahead — showed a 10% increase in earnings — this turned out to be vastly incorrect.
What about now?
The big question for investors will be what about now? The stock’s certainly cheaper having fallen 43%. It now trades at 12.5 times forward earnings but, sadly, earnings are expected to fall 13.4% this year.
The PEG ratio — which I find the most telling — now sits at 8.9. That’s simply because the forecast offers almost nothing in the way of earnings growth.
Instead, Greggs needs to be thought of as a different kind of investment for the thesis to make any sense. And that’s a dividend-paying stock.
The yield now sits at 4.4% on a forward basis, rising slightly to 4.5% in 2026 — based on the current share price and payment projections.
With earnings stagnating/falling, I don’t think there’s much scope for the divided to increase too much. However, this 4.4% dividend yield and 1.8 times coverage isn’t too bad at all.
Worth a look?
Is it one to consider? For me, no. I think there are better opportunities to research elsewhere. I simply don’t see any catalysts that will take the stock higher other than a simple earnings beat — and that’s not clear at the moment.
What’s more, the government tried to back workers by increasing the National Minimum Wage. But coupled with higher employee contributions, low-margin business are feeling the pain. There could be more pain to come later this month.
