Take a deep breath! £10,000 invested in Greggs shares a year ago is now worth…
As a buy-and-hold investor, I like to tuck shares into my portfolio that I can anticipate holding for a long time. At first glance, my shareholding in Greggs (LSE: GRG) might seem unsurprising on that basis. The baker has a well-established, profitable business and ongoing growth prospects. But lately, Greggs shares have performed badly â and some investors seem to think things could get worse from here.
Whatâs going on?
Not a tasty performance from the high street baker
Over the past year, the share price has fallen 15%. That is disappointing, especially as the FTSE 250 index (of which Greggs is a member) has moved up 10% during the period.
So, someone who spent £10,000 buying Greggs shares a year ago would now be nursing a paper loss of around £1,500.
There would have been dividends along the way. Currently the yield is 4.3%.
Someone who bought at the higher price 12 months ago would be earning a lower yield and ought to be receiving roughly £365 annually in dividends. That goes some way to easing the pain of the share price fall, but the investment would still be well below water.
An inflection point in the growth story
Last Summer, Greggs issued a surprise profit warning after misjudging what to stock during a period of warm weather.
That hurt the shares as well as City confidence in management. Howver, it was only one part of the reason for the poor share performance.
There is also the bigger question of whether years of strong growth ambitions could be ending. Greggs may have reached a saturation point in some areas with multiple branches in close proximity, while changing diets and the use of weight loss drugs hurt demand.
This could be a value trap
Lately, Greggs have been among the most shorted FTSE 250 shares in the market.
That means people are spending money on options in the expectation that the share price will fall even lower.
The current price-to-earnings ratio of 13 does not look very high but it is also not cheap. Still, I think Greggs could offer bad value even at this level.
Wage bill increases have hurt profits and I see a risk that will continue. The demand risks I mentioned above could grow over time.
I am also increasingly unconvinced that current management has a full handle on how to restore City confidence, after reporting an 18% fall in pre-tax profit last year despite revenues growing 7%.
Iâm in it to win it (I hope!)
Still, that revenue increase suggests that fears of the chain’s growth years being behind it may be overdone.
While Greggs shares could be a value trap, I am hoping that they are badly undervalued right now and will close that valuation gap (or some of it) over time. I have no plans to sell.
The basic formula here is compelling – – and proven, I feel.
Greggsâ massive footprint gives it unrivalled economies of scale among UK retail bakeries.
Its offering represents good value for many customers on the hunt for cheap, convenient food â and people need to eat no matter what happens to the economy.
If management can restore confidence, underline the message that in fact Greggs revenue is still growing, and keep a handle on costs, I think the share price could hopefully move upwards in coming years.
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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.
