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Is this FTSE 250 growth stock an unmissable bargain at just 15 times earnings?

Shares of bakery chain Greggs (LSE: GRG) has been on a tear lately, up over 130% in value over the past five years and handily beating the FTSE 250 index to which they belong. With the company’s shares trading at just 15.6 times trailing earnings despite three straight years of double-digits earnings growth, is Greggs one growth stock that’s simply too cheap to pass up?

There is good reason to be cautiously optimistic on the company’s near-term outlook. Many investors have been scared off by management’s disclosure that they expect margins to stagnate or reverse in H1 2017 as the increased national living wage and inflation take their toll on the company’s cost structure.

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Yet management has still guided for increased profits during the year thanks to estate expansion and like-for-like sales growth as it rolls out new food-to-go offerings and concentrates on breakfast food and drinks. At the end of December the group was trading from 1,764 locations across the UK and guided for around 100 new store openings in 2017.

So far, this expansion looks to be on track as the company had a net increase of 28 shops in Q1 as it expanded its footprint in Northern Ireland and the south west. New stores, together with a 3.6% increase in like-for-like sales at company-managed outlets, led overall sales to rise 7.5% year-on-year.

Impressive same-store sales growth shows that the company’s push away from high street locations to travel outlets and food-to-go offerings is paying off with customers. While stagnant margins are a worry in the short term, the company is looking to mitigate the negative effects of increased staffing costs with distribution centre consolidation and cost savings in back office functions and procurement.

All told, Greggs’ shares may not be the bargain of the century but for investors who believe in its growth story now, it may not be a bad time to take a closer look.

An under-the-radar growth star

Another food group that is growing rapidly is meat packer Hilton Food (LSE: HFG). The company has been expanding through both organic growth from its existing customers, industry consolidation and geographic expansion with new sites in Europe.

All of these factors together led sales to rise 12.8% year-on-year in 2016 to £1.2bn. The weak pound exaggerated this growth but an 8.9% rise in sales on a constant currency basis shows the company’s business model is bearing fruit. Also of note is that volume growth was only 7.8% in the period, showing Hilton’s pricing power is increasing as it expands in size and scale compared to competitors.

Increased scale also helped boost the group’s operating margins from 2.6% in 2015 to 2.7% last year. Although these margins are razor thin they also represent a deep moat to entry for competitors, which together with a net cash position of £32.3m at year-end bodes well for the company’s ability to continue expanding over the medium term.

The bad news is that institutional investors have fallen in love with Hilton and the company’s shares now trade at a pricey 21 times forward earnings. This is a lofty valuation but the well-executed business model and rising 2.2% dividend yield mean I’ll be following closely for any dips in price.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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