When Greggs (LSE:GRG) shares were trading at over £30, I couldn’t quite believe it.
Either I was missing something, or as I suspected, retail investors were simply following the money. The stock had been moving in the right direction for a while and everyone knows the company — it appeared to have operational momentum. Sounds like a great opportunity right?
The issue is that’s not how the stock market works. And it’s often how retail investors, especially novice ones, get their fingers burned.
The positive twist here is that we can all become better investors.
My first investment was in Crest Nicholson and it turned out to be a poor one. The problem was there was no valuation-based thesis behind it.
More than a decade later I can say that only two stocks I’ve held for more than six months are in the red. Seven of the 20 have at least doubled in value.
Ok, back to Greggs. Is it time to consider the stock?
Starting with the valuation
The shares now trade around 12.7 times forward earnings. That’s well under the index average, but everything is contextual. Net debt now equates to around 25% of the market cap. Adjusting for net debt, the stock is trading closer to 16 times forward earnings.
But what about growth? Well, the medium-term forecast doesn’t suggest much growth will be forthcoming. And that’s why the price-to-earnings-to-growth (PEG) ratio sits around nine. For context, a good PEG ratio is under one. The caveat is that the PEG ratio can be easily swayed when the growth forecast is close to nothing.
That said, the dividend yield is relatively compelling. On a forward basis it stands around 4.3%, although the coverage ratio (how many times it can pay dividends from net income) has fallen to 1.83 times. A ratio above two is definitely more secure.
What does all this data tell me? Well, it doesn’t scream undervalued.
Operating in this environment isn’t easy
Greggs has great brand value. We all know of it and it’s hard to miss on the high street with that blue and yellow colouring. The company has been leveraging this for years, expanding its store count significantly. There are now more than 2,600 in the country.
However, let’s face it. The British high street isn’t an easy place to operate. Energy costs are the highest in the world, staffing costs are going through the roof, and the economy isn’t exactly firing on all cylinders.
What’s more, GLP-1s aren’t helping Greggs’ carb-heavy menu. As weight-loss drugs like Wegovy and Ozempic rise in popularity, consumer appetite for high-calorie snacks may shift.
Greggs is trying to cater for this more health-conscious audience, but my hunch is that the sausage-roll maker won’t be the first port of call. That’s not to say it can’t succeed here, I just don’t expected it to positively contribute to the company’s operations.
Bringing this all together, there’s just not enough going on to excite me. And honestly, I think there are better opportunities out there for consideration.
