Could the Greggs share price double from here?
Many customers of Greggs (LSE: GRG) choose its pies or sausage rolls for their stuffing. But the Greggs share price has had the stuffing knocked out of it, falling by 49% since the end of 2021.
In other words, it has more or less halved. Could it double, getting back to just above where it was?
I have been buying Greggs shares this year because of my optimism in the investment case. But I do see some possible hurdles along the way to recovery.
A solid basic business case
To start with, consider why investors used to think Greggs deserved a higher share price. A lot of those factors are still relevant today, in my view â and likely for the foreseeable future.
Its huge shop estate and focus on its home market give the baker economies of scale as well as a clear strategic direction. Demand for affordable and convenient food is not only high, but resilient.
Meanwhile, Greggs has spent decades building its product range, brand, and customer base.
All of those things help to give it a firm foundation for ongoing commercial success and future growth, in my view. Indeed, this month the company reported that the first nine months of this year saw total sales grow 7% year on year.
Whatâs gone wrong?
But if the basic business case is compelling now and was back in 2021, why has the Greggs share price almost halved?
A few reasons can help explain the fall.
A shock profits warning this summer raised questions about management confidence and also highlighted how Greggsâ offering (especially hot food) may see its appeal wane as weather or consumer preferences shift.
Declining foot traffic in many high streets also threatens Greggsâ business. On the other hand I think the chain has done a good job to build its out-of-town business as well as opening new locations in busy areas like transport hubs.
Is the competitive landscape changing?
Scottish baker Bayneâs is growing its presence north of the border in part of Greggsâ traditional heartland. Such competition could end up putting price pressure on Greggs. This could make it difficult to raise selling prices. At a time when employment costs are rising, that is a risk to profitability.
I think this looks tasty!
Still, are any of those risks existential?
They do not seem like it to me.
Instead, Greggs seems like an attractive business that is just riding the ups and downs of typical commercial existence.
Over the long run, it has created substantial shareholder value.
The current dividend yield is 4.1% — and the Greggs share price has grown 734% since the turn of the century, even after the fall of recent years. That compares very well to the 245% growth in the FTSE 250 index (of which Greggs is a member) over the same period.
The current price-to-earnings (P/E) ratio of 12 looks cheap to me. But doubling the share price would mean a P/E ratio of 24. That strikes me as unjustifiably high given the companyâs inconsistent recent performance.
Could earnings rise? Yes, but cost pressures and tightening consumer spending put a limit on earnings growth, in my view.
So, over the medium term, I do think the Greggs share price could rise â but I do not expect it to double.
The post Could the Greggs share price double from here? 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.
