Down 38% with a 4% yield and P/E below 12! Are Greggs shares now a generational bargain?
I canât resist a steak bake on a cold winterâs day, but so far Iâve resisted Greggs (LSE: GRG) shares. For a while, that felt like a mistake, as the FTSE 250 bakery chain turned itself into a national cult and the stock became piping hot.
Greggs got so many things right. Through canny marketing, it flipped its reputation as a purveyor of old-school stodge and made itself cool, largely thanks to the brilliant vegan sausage roll wheeze.
The business did the groundwork too, expanding across high streets, supermarkets, retail parks, railway stations and airports, while testing evening openings. It even turned the cost-of-living crisis on its head. While shoppers struggled for cash, Greggs still gave them a cheap treat to enjoy. Culinary patriots will have enjoyed watching it take on the big burger and fried chicken chains.
Red-hot FTSE 250 stock
It was a pioneer as well, rolling out hits like the All-Day Breakfast Baguette, Mexican Bean & Spicy Cheese Flatbread and Pumpkin Spice Doughnuts.
No stock climbs forever though. Eventually, the cost-of-living crisis caught up with it, as cash-strapped Britons struggled even to afford a cheeky trip to Greggs.
On 1 October last year, it shocked investors by flagging a slowdown in Q3 sales growth. Like-for-like sales still rose 5%, but that was down from 7.4% in the first half, confounding investors who thought the shares would keep expanding forever, like the nationâs waistlines.
Instead, they contracted at speed and are down 38% over the last year. Suddenly, it feels like investors have a second bite at the Greggs growth story.
A year on from that initial October shock and growth is slowing again. Sales still rose 6% in the 13 weeks to 27 September, but that was down from 7% in the first half. Not exactly disastrous though. Plenty of businesses would kill for that kind of growth.
The board blamed unusually hot July weather, with sales picking up in August and September as temperatures stabilised, alongside everybody’s favourite culprit these days, âchallenging market conditionsâ. These are undoubtedly grim times for the high street, and Greggs deserves credit for holding up as well as it has.
Lower valuation, higher dividend
With the economy shrinking 0.1% in both September and October, thereâs little hope of a quick turnaround, despite last Thursdayâs interest rate cut. Margins will also be squeezed by hikes to Employersâ National Insurance contributions and another inflation-busting increase in the Minimum Wage next April.
Greggs is still expanding, planning 120 new shop openings this year, while remaining ruthless about closing underperforming outlets.
At its peak, the shares became strangely expensive for a budget food business, with a price-to-earnings ratio of around 22. Today, they’re roughly half that at 11.5, which may tempt bargain hunters. The share price is already warming up, climbing 17% over the last month.
When the shares were flying, the yield fell to around 2%. Now itâs 3.97%, which matters as growth may be harder to come by. An economic recovery should help, although that still feels some way off. Plus there’s a risk that consumers could trade up to pricier treats.
I think Greggs shares are worth considering today, if not quite a generational bargain. However, I can see tastier UK stocks, and Iâll sink my teeth into those instead.
The post Down 38% with a 4% yield and P/E below 12! Are Greggs shares now a generational bargain? appeared first on The Motley Fool UK.
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Harvey Jones has no position in any of the shares mentioned. 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.
