The Motley Fool

Up more than 400% over 10 years. Should you buy this share now?

Bakery food-on-the-go retailer Greggs (LSE: GRG) is a good example of how valuations can re-rate upwards when a growth story becomes well known.

Ten years ago, the firm was debt-free, cash-generative, engaged in a store opening programme that it was pretty much self-financing and generally looking like a vibrant, well-placed business.

Claim your FREE copy of The Motley Fool’s Bear Market Survival Guide.

Global stock markets may be reeling from the coronavirus, but you don’t have to face this down market alone. Help yourself to a FREE copy of The Motley Fool’s Bear Market Survival Guide and discover the five steps you can take right now to try and bolster your portfolio… including how you can aim to turn today’s market uncertainty to your advantage. Click here to claim your FREE copy now!

However, back in 2010, the stock market was depressed because of the credit-crunch event that happened a couple of years earlier. The major indices had bounced back from their lows of 2009, but all the talk was of a double-dip. In short, fear was rife in the markets.

A once-modest valuation

And that fear led to the situation where great-looking companies such as Greggs languished on modest valuations. In one article of the period, I recorded a share price of 468p for the firm and a historical price-to-earnings (P/E) ratio of 14, despite the fine attributes of the business. Today, the share price is around 2,416p and the historical P/E around 28.

If you’d bought some of the shares in 2010 and held until today, you’d be sitting on a more than 400% capital gain. And on top of that, the company has delivered a generally growing stream of dividends over the decade. All that progress for shareholders has been driven by the twin engines of underlying business growth and a valuation up-rating.

But although bullish on Greggs in 2010, I was first ‘wrong’. By the spring of 2013, the share price had slid by around 17% driven by slipping profits and weaker like-for-like sales. Perhaps there’s a lesson in that. To capture the big gains that were to follow you would have needed to keep faith with your own assessment of the company and held through the temporary operational difficulties and the stock market’s pessimism.

Robust trading and growth

Meanwhile, today’s fourth-quarter trading update is robust. In the full-year of trading in 2019, total sales grew by 13.5%. Some of that figure reflects ongoing expansion via new store openings, but Greggs is appealing to its customers because like-for-like sales from company-managed shops rose by an impressive 9.2%.

The firm opened 138 new shops in the period and closed 41. Such active management of the portfolio strikes me as a good thing. Cutting losses and under-performing outlets quickly is a good idea, before they drag on the finances too much. I reckon such a strategy is key to the successful running of a share portfolio too.

Overall, the company now has 2,050 shops, but 302 of them are franchised and operated by partners in travel and other convenience locations.  The way the company has managed to expand beyond traditional high-street locations seems to bode well for future growth. In 2020, the firm is targeting another 100 net openings, for example.

The directors expect full-year underlying profit before tax to come in “slightly higher” than their previous expectations and announced a £7m special payment to be shared among all employees. Looking ahead, they see cost pressures but believe the momentum in the business will carry the company through. Despite the valuation re-rating over the past few years, I reckon Greggs is worth following with a view to buying some of the shares at opportune moments.

A top stock with enormous growth potential

Savvy investors like you won’t want to miss out on this timely opportunity…

Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this ‘pure-play’ online business.

Not only does this company enjoy a dominant market-leading position…

But its capital-light, highly scalable business model has been helping it deliver consistently high sales, astounding near-70% margins, and rising shareholder returns … in fact, in 2019 alone it returned a whopping £151.1m to shareholders in dividends and buybacks!

And here’s the really exciting part…

We think now could be the perfect time for you to start building your own stake in this exceptional business—especially given the two potentially lucrative expansion opportunities on the horizon that our analyst has highlighted.

Click here to claim your copy of this special report now — and we’ll tell you the name of this Top Growth Stock… free of charge!

Kevin Godbold has no position in any share 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.