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Are Greggs shares too cheap to ignore?

For a few years, baker Greggs (LSE: GRG) has been the toast of the high street. Savvy marketing combined with low-ticket treats had people queueing outside the FTSE 250 member’s stores. There were even ‘midnight openings’ for new products

From an investment perspective, Greggs has been even sweeter. Go back to 2013 and the stock changed hands for around 400p. Fast forward to this January and the very same shares were trading at 2,550p a pop. Who needs a high-flying electric car company when you can make a very healthy profit from the humble sausage roll? 

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Greggs vs Covid-19

Since then, of course, the world has been turned upside down. The arrival of the coronavirus on UK shores resulted in people being unable to get their Greggs fix. It may have been bucking the trend of listed companies on the high street, but that mattered little when said high street was shut for business. 

Thankfully, we now appear to be through the worst. Greggs, however, is staying cautious, almost totally suspending its new shop opening programme and accelerating its delivery and click & collect services. It’s also been negotiating rent reductions with landlords.

However, it would seem that investors aren’t inclined to wait around for normal business to resume. At Friday’s close, Greggs shares fetched 1,481p — 42% off their all-time high.

The question is whether this price is fair or even a downright steal. For now, I’m inclined to go with the former.

Baked in?

I don’t think there can be any doubt that Greggs possesses many of the hallmarks of a great business. It generates consistently excellent returns on capital (low-to-mid 20%), has a strong brand, a loyal following and solid finances. Margins are also higher than you might expect — around 10%. 

All that said, there are reasons to think the shares could still have further to fall. For one, it’s looking like the UK economy will take longer to revive than first thought.

While recent figures show retail sales are improving, it would seem that many of us are struggling to break the new habit of buying more online and less from physical shops. In addition to this, a lot of office workers are still to return to their desks and the number of people filtering through train stations and airports is clearly still less than it was. All of these things impact on early morning and lunchtime sales at Greggs.

Tomorrow’s interim results will provide an inkling on how the company is faring post-lockdown, but I’m not expecting anything remotely pretty in the numbers just yet. After all, Greggs already stated in June that it expects sales will be “lower than normal for some time” and that it will be limiting its product range to best-sellers as a result.

Contrarian bet

Nothing can be guaranteed when it comes to stocks and being an existing holder of Greggs no doubt makes me biased. However, I struggle to imagine why it won’t bounce back even stronger once the coronavirus dust settles. For this reason, I’m likely to increase my (still modest) holding if the share price continues heading downwards in the near term. 

Successful investing involves distinguishing between companies experiencing short-term blips and those suffering game-changing problems. Greggs, I believe, is surely in the first category.

I’m getting ready to tuck in.

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That’s why we think now could be the perfect time for you to start building your own stake in this exceptional business – especially given the shares look to be trading on a fairly undemanding valuation for the year to March 2021.

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Paul Summers owns shares of Greggs. 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.