Shares in baked goods and FTSE 250 constituent Greggs (LSE: GRG) were in fine fettle this morning following news the excellent start to its financial year has continued.
Before getting into whether Foolish investors may wish to consider buying or selling the shares at the current time, let’s take a closer look at those all-important numbers from today’s update.
“Materially higher” profits
Thanks to more people visiting its shops, total sales have “continued to grow very strongly,” increasing a little over 15% in the first 19 weeks of the year.
Compare that to the 4.7% achieved over the same period in 2018 and you get some idea of just how well the “leading bakery food-on-the-go retailer” has been doing lately.
Like-for-like sales from its 1,700 company-managed units rose 11.1% from 1% last year. That’s also more than the 9.6% growth from the first seven weeks of 2019 reported back in early-March.
It seems people simply can’t get enough of those much-hyped vegan-friendly sausage rolls. But it gets better.
Those already holding the stock will also no doubt be cheering the company’s comments with regard to its outlook for the rest of 2019. Despite facing increasingly tough comparatives from last year, management now believes Greggs will achieve “materially higher sales” than previously expected.
While there will be some ongoing investment, underlying profits (before exceptional costs) will now be “materially higher” too.
As an investor, it doesn’t get much better than that. No surprise then that Greggs shares are now 13% higher as I type.
But will it last?
I don’t mind admitting that, back in January, I questioned whether it might be time to take some profit on Greggs. After all, the shares had already done extremely well following my initial buy call back in May last year.
Thanks to recent positive trading and a resurgence in general market sentiment over the first five months of 2019, however, the stock just refuses to acknowledge gravity.
Assuming its new summer menu is positively received and plans to continue growing the number of units in travel and workplace catchments are realised (it opened 38 news shops in the trading period, 10 of which were franchises in transport locations), it’s certainly possible that they could move even higher.
So, has my view now changed? I really don’t think it has. While I consider Greggs to be a fine business (returns on capital employed have been in the mid-20s for a number of years now) and a rare exception to the vast majority of firms that have a presence on the average high street, I can’t get away from the fact that the shares have now gone from expensive to seriously expensive.
Before today, analysts were forecasting earnings per share growth of 4.2% in the current financial year. That gave Greggs a forward price-to-earnings (P/E) of 23 — a valuation you might expect from either a hyper-reliable consumer goods company, or a promising technology business. Last time I checked, Greggs was neither. Rather tellingly, its five-year average P/E is 17.
Although profits are now expected to be higher, this is arguably already priced in following today’s reaction. In my experience, high expectations tend to be positively correlated with a higher risk of disappointment.
If the novelty of its vegan sausage rolls (particularly among self-identifying carnivores) begins to dissipate, I’m wondering if those buying in at today’s record share price may regret their purchases.
Paul Summers has no position in any of the 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.