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On a roll! Greggs shares leap 15%! Here’s why

At the start of the year, Greggs (LSE: GRG) released a piece of news which divided people. Some people were delighted and had now a reason to visit the bakery store. Others, like Piers Morgan, mocked the company.

I am, of course, referring to its vegan sausage roll. Never before has a baked good split the public opinion so much. But from an investor’s point of view, it opened up the bakery to a whole new market of people.

On Monday, Greggs lifted its profit after strong sales growth. Let’s take a look at the numbers and see if it’s something you should think about holding in your portfolio.

Rising dough

In the six weeks leading to 9 November, total sales rose 12.4%, up from 8.5% in the same period last year. Greggs put this down to an unexpectedly large increase in customer visits. Consequently, like-for-like, its company-managed shop revenue was up by 8.3%.

Year to date, total sales are up by 13.4%. Analysts believe the profits will be roughly £5m more than the anticipated £108m.

This news was understandably welcomed by investors. In the past week, the shares have increased by approximately 17%, sending the price-to-earnings ratio soaring to 29.

In what is a tough high-street and food environment, these results are unusual. What is the FTSE 250 baker doing differently from its rivals, and can we expect similar growth in the future?

Healthy outlook?

This is the second time this year that the profit outlook has been upgraded by Greggs. Back then, the company acknowledged that the increase was due to the publicity surrounding its vegan sausage roll.

Greggs has more than 2,000 stores in the UK, offering convenience type food at a low price-point, and it is therefore perhaps unfair to make comparisons with struggling food chains. In a busy world, customers want something easy that they can grab quickly.

It will be interesting to see how Greggs adapt to changing, healthier palates. The vegan offering, which it plans to extend to all of its bestselling options – including steak bakes and doughnuts – looks like it was the step in the right direction.

In the FT, CEO Roger Whiteside mentioned that the company had overtaken the supermarket Tesco in its lunchtime sale of sandwiches. Proving that Greggs is more than just pastry.

Proof in the pudding

With great results like these, would I buy shares in Greggs?

In a word, no. Despite the company having a fantastic year, I believe the business is now overvalued, especially when the measly prospective dividend of 1.7% is taken into account.

I also think the business could be susceptible to competition and changing customer tastes.

I don’t think Greggs is a bad business. But without a wide margin of safety, I would not be confident that buying now could offer me the desired returns.

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T Sligo 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.