Should you buy Greggs plc after sales rise 5.6%?

Is Greggs plc (LON: GRG) a worthy addition to your portfolio after positive sales numbers?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Food retailer Greggs (LSE: GRG) has released an upbeat third quarter trading update. It shows that the company is making progress with its new strategy. It also provides guidance as to whether Greggs is a buy or a sell right now.

Greggs recorded a rise in total sales of 5.6% in the 13 weeks to October. This is a good result given the difficulties experienced in the UK economy and is in line with the company’s expectations. It shows that Greggs’ summer menu options were popular among consumers, with the company’s like-for-like (LFL) sales rising by 2.8% during the period.

Transports of delight

Clearly, the UK economy is set to endure further uncertainty in the future. Brexit could cause rising unemployment and a slowdown in the rate of economic growth, according to the Bank of England. However, Greggs seems to be positioning its business to successfully overcome such challenges. Its focus on improving the efficiency of its business through an optimised supply chain should help to boost profitability. Furthermore, it’s closing up to 80 stores this year. Alongside the opening of up to 150 shops, this could positively catalyse its bottom line.

Greggs continues to focus new store openings on transport locations. This is a sound strategy, since it provides the potential for higher margins as well as a relatively consistent sales outlook. While there is scope for further store openings, Greggs is also focused on improving its menu choices. Its coffee offering and refreshed menus could allow LFL sales to stay high after the first nine months of the year when they grew by an impressive 3.4%.

A major shift

Looking ahead, Greggs is forecast to increase its earnings by 9% next year. This puts its shares on a price-to-earnings growth (PEG) ratio of 1.9. While this is not an exceptionally high valuation, it does not offer particularly good value at a time when the outlook for the UK retail sector is highly uncertain. In other words, Greggs seems to lack a margin of safety which makes its risk/return profile somewhat unappealing.

For example, in the same sector is Tesco (LSE: TSCO). It is also enduring a period of change as it refocuses its business on the UK grocery space. This is similar to Greggs’ strategy of closing less profitable stores and replacing them with new stores in superior locations as it represents a major shift in the company’s business operations. However, unlike Greggs, Tesco trades on a PEG ratio of just 0.5 thanks to its forecast growth rate of 37% in 2017.

This doesn’t mean that Greggs’ share price will fall. However, it does mean that it offers less upside potential than Tesco and other retail sector peers. As a result, now may not be the right time to buy Greggs when its sector peers offer better value for money.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Tesco. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »