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This FTSE 250 growth stock has FALLEN on news of exceptional trading. What’s going on?

Shares in high street baker Greggs (LSE: GRG) were struggling this morning, despite the company reporting news of “exceptional trading” to the market. 

Here’s my take on why some investors have chosen to head for the exits.

Profit soars 58%

To be clear, it’s nothing to do with recent trading.

Thanks in part to the success of its vegan sausage roll, total sales rose 14.7% (to £546m) over the six months to 29 June (or 10.5% excluding franchise stores). Underlying pre-tax profit came in at £40.6m — a staggering 58% increase on that achieved over the same period last year.

It’s not just revenue and profits that are going up. Greggs opened 54 new shops over the trading period and is targeting 100 net for the full year. This would bring its total estate to well over 2000 by the end of 2019.

As a sign of confidence, the interim dividend was also hiked 11.2% to 11.9p per share — a third of the 35.7p per share total paid out last year, in accordance with company policy. With £35m in cash now deemed “surplus to requirements“, a special dividend of 35p per share was also announced. 

Despite all this, the shares are down almost 5% as I type. I think there’s more than one reason for this.

Have we reached ‘peak Greggs’? 

First, it seems unlikely that the double-digit rise in revenue and profits announced this morning will continue. Indeed, the company itself said that it expects like-for-like growth “will begin to normalise” going forward given that trading over the second half of its last financial year was significantly better than during the first half of 2018.

Higher food input costs are also predicted in H2 — a development which Greggs believes will result in overall cost inflation being at “the higher end” of expectations. This, coupled with management’s decision to increase investment as part of its long-term growth strategy will likely offset the current strong trading. As a result, Greggs has chosen to maintain its previous guidance on underlying profit for the full year. While this is a perfectly reasonable decision, it might not sit well with those investors who have become accustomed to the company’s tendency to exceed forecasts.

There’s also our departure from the EU to consider. While it appears to be taking prudent steps to mitigate the potential disruption caused by a no-deal Brexit (such as stockpiling key ingredients), Greggs did comment that this seismic political and economic event “continues to present significant uncertainties in the months ahead“. Nothing particularly revelatory there but still something investors should consider

A final potential reason for today’s fall is that, as an investment, Greggs simply isn’t the bargain it once was. Let’s not forget that the FTSE 250 member has more than doubled in value in the last 12 months alone.

The 15% rise in earnings per share predicted by analysts for the current financial year leaves the shares trading on a forecast P/E of 28. That’s expensive for a promising small-cap technology stock, let alone a food-on-the-go retailer (albeit one generating consistently high returns on the money it invests). As such, I maintain my view that it might be appropriate for long-term holders to consider banking at least some profit.

Greggs is undoubtedly a great business but with the shares priced to perfection, it’s not a company I would choose to add to my portfolio right now. 

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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.