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Why high-flying Greggs is my next big long-term hold

Greggs (LSE:GRG) now has over 2,000 outlets nationwide, and exceptional growth in the much-loved pastie chain means it has jumped right to the top of my watchlist.

One of the reasons headline writers love the company is that they can continually write puns like growth being ‘baked in’ to the share price.

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Investors aren’t far behind in their appreciation either.

Its savvy social media approach and customer engagement means it retains a remarkably loyal following, much like Games Workshop, one of my other favourite long-term holds.

Eat it up

It can be thoroughly depressing to research a share only to find that everyone else has already come to the same conclusion that it is a winner, and that you will now pay quite the premium to jump on board.

That’s represented in the price-to-earnings ratio on offer here: paying 32 times earnings will be too dear for many value-seekers, but I think avoiding Greggs would be a mistake.

Looking beyond the much-discussed vegan sausage roll — a PR masterstroke, by the way — there are many reasons to be cheerful in the longer-term outlook.

High street stars

2019 saw the collapse of scores of big name stores including Mothercare and Debenhams with the loss of thousands of jobs, while struggling chains like Karen Millen and Coast were snapped up by fast-growing online-only upstart Boohoo.

Meanwhile, appetite for Greggs products has only continued to grow.

In a fourth quarter trading update on 8 January the company shared that total sales were up 13.5% in 2019, compared to 7.2% in 2018. And the chain is expanding at an ever increasing rate, with 138 new stores opened across the year.

I also like how Greggs chief executive Roger Whiteside has invested in long-term staff retention, sanctioning a £7m payout to employees as reward for what has been outstanding performance.

Full-year underlying profit before tax is slated to be ahead of expectations, boosted by increased customer visits, strong sales, and a record financial performance.

Innov-eat

The best thing about Greggs is that innovation is never far away. Added to the menu this year were a vegan steak bake and even a vegan doughnut, and Whiteside says more stores will now extend their opening hours to 9pm.

But the expansion of its delivery service with Just Eat will be the main long-term sales winner, in my view. Bristol, Birmingham, Manchester, Leeds, Sheffield, and Nottingham will be added to the service already available in London, Newcastle, and Glasgow.

An entire cottage industry sprang up with courier-entrepreneurs delivering McDonalds to hungry patrons before the US giant cottoned on and signed up with Uber Eats to add these sales to their bottom line, and I think Greggs will cash in strongly on this move.

Whiteside added that “cost inflation headwinds” posed a significant challenge for 2020 but “strong momentum” in the business meant his team could pursue “further growth opportunities across a number of channels“.

If the Greggs share price continues to rise in line with expected earnings then a sensible investment here could pay you back many times over. If you were to look back on your portfolio five years from now, I’d wager that an investment in Greggs would be one of your best decisions.

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Tom Rodgers has no position in 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.