The Greggs (LSE: GRG) share price rose about 60% in the past six months. However, the stock is around 10% lower than its pre-Covid-19 levels. The company’s efficient handling during the pandemic has increased investor confidence in the past few months.
I would like to understand the pros and cons of investing in this company.
The bull case for Greggs shares
The company recently reported an annual loss of £13m. It is its first annual loss since it was listed on the London Stock Exchange in 1984. This is a remarkable feat for any company. The losses this year were expected due to the disruptions caused by Covid-19. The improving results in the second half of 2020 show some strong momentum for the future.
Greggs products are much loved by its customers. Its breakfast rolls, sandwiches, and pastries have all got good loyal customers. It has been able to adapt very well to the changing needs of the people. It has also partnered with Just Eat for deliveries. The initial results of this partnership are encouraging. The click and collect service will also continue to be popular in the future.
The company’s strategic plan is progressing well. By the year 2024, it plans to have less than 50% of its business in the high street. Currently, it is 56%, down from 80% in the year 2012. The advantage of having fewer stores in the high street is, it is cheaper to operate and also, it can cater better to the residential areas. It also plans to add an evening food menu in the future.
The bear case for Greggs share price
The company has been able to start operations on a limited basis. Looking forward, we could expect full operations in June. However, there is no guarantee that the business will return to pre-Covid-19 levels. There are a lot of people who could shift to working-from-home. So, the company will miss this business. Also, a lot of people have got accustomed to home food during the lockdown.
Next, the company has plans to open 100 new stores in 2021. It has a capital expenditure of about £70m. However, lower growth due to the Covid-19 could put pressure on the company’s balance sheet. Also, in the longer term, the company has plans to expand internationally. The company in the past had to close its small operations in Belgium, due to losses.
Looking into the valuation, the company reported an earnings loss per share of 12.9p. So, it’s difficult to look into the current price-to-earnings (P/E) ratio, the 2021 analyst’s earnings per share estimate is 52p, which would give a forward P/E ratio of 43. In my opinion, the shares are not cheap. Also, a point to remember, the actual company’s performance might differ from the analysts’ estimates.
Greggs has good products, with an excellent business model. It has reduced its operating expenses during the pandemic. However, I am not a buyer of the stock at the current Greggs share price, since I believe the upside is not much at the current valuation.
Royston Roche 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.