Down 34%, are Greggs shares now a bargain?
Consumer tastes change over time – and so do investor preferences. Take Greggs (LSE: GRG) as an example. Over the past year, Greggs shares have lost a third of their value.
Does that reflect a shifting valuation for the underlying business? Or could this be a potential bargain for investors to consider?
Here’s why I acted on a falling share price
I take the latter view. Indeed, I recently bought some Greggs shares for my portfolio.
Such a big share price fall does not typically happen without reason though. A number of things seem to have been concerning investors lately about Greggs and this month’s annual results served to bring some of them into sharper focus.
One is weaker growth rates. Another is the impact of a sluggish economy on discretionary consumer spending. Another is the ongoing costs of scaling the business, such as building additional production lines.
But while I recognise the risk such things pose to profits, none of them change the underlying business model at Greggs, as far as I am concerned. The market for cheap, convenient takeaway snacks and food is huge. Greggs has a large shop estate, strong brand, some differentiated products and a proven business model. Last year, the baker reported profits north of £200m before tax.
Value’s in the eye of the beholder
What makes the stock market a market is that different buyers and sellers do not necessarily agree on what a company is worth. Again, take Greggs as an example.
It ended last year with around £665m of property, plant and equipment on its balance sheet. But while that is presumably a fair valuation, it does not mean the company could raise that much selling the kit. The market for secondhand pastry-filling machines is not a sellers’ market.
It also had around £180m of inventory and cash and cash equivalents. It was owed money by some trade debtors, but had larger payments to trade and other creditors outstanding.
Taken altogether though, all the Greggs shares in issue add up to a market capitalisation of almost £2bn. That is substantially more than the sum of the parts I mentioned.
Why? Greggs has proven it can generate sizeable profits. Its brand has significant value, in my eyes (although on its balance sheet, the company values all intangible assets at under £25m). The loyalty of its large customer base has some value too.
In other words, investors are looking at what they think Greggs is worth based on how much money it can generate from hereon in, not just its assets.
This share looks cheap to me
The steep fall in the past year might suggest that Greggs’ ability to make big profits in future is now more than in doubt than it was 12 months ago.
But I do not see things that way. I reckon a price tag of under £2bn for the company looks cheap. I reckon value-minded long-term investors should consider Greggs shares.
The post Down 34%, are Greggs shares now a bargain? appeared first on The Motley Fool UK.
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C Ruane has positions in Greggs Plc. The Motley Fool UK has recommended Greggs Plc. 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.
