Could the Greggs share price double in 5 years?
Over the past year, Greggs (LSE: GRG) has been far from a tasty stock market performer. The Greggs share price has tumbled by 23% in just 12 months.
It has fallen 51% since the end of 2021. But I have been buying the share, because I reckon it is undervalued and may recover strongly in coming years.
In fact, I think it could potentially double in value over the coming five years.
Why Greggs has tumbled
Before getting on to the grounds for my optimism, what has gone so badly wrong at Greggs?
Understanding that matters. For the Greggs share price to rise strongly, I reckon the company will need to show solid progress on all or some of the issues that have been concerning the City.
With some 33,000 employees, rising National Insurance and wage costs are a concern for the companyâs bottom line.
Misjudgement over the product range in the summer led to a profit warning. That has hurt confidence in management and also raised the question of how relevant for its customers Greggsâ product offering is. Those concerns have been exacerbated by the growing use of weight-loss drugs.
That feeds into wider concerns about whether Greggs is starting to reach the limits of its growth potential. With thousands of shops already, sales growth is being driven by new shop openings more than same-store sales improvements.
But there is only so much more white space for new shops before Greggs reaches saturation point in the UK market.
I still see a lot to like here
Still, while I do see some of those risks as big ones, I think the bigger picture here remains a positive one.
Greggs has proven its business model over the course of decades.
It enjoys sizeable economies of scale and national brand awareness.
Good value never goes out of fashion, including when the economy is struggling and consumers become more price sensitive. So I think the business has ongoing potential to do well.
Growth can bring efficiencies, helping to boost earnings. Meanwhile, Greggsâ value proposition and proven marketing prowess could help sales grow, as they have in the past.
The existing shop estate also offers sizeable growth opportunities.
Greggs has historically been seen as a lunch or breakfast destination, but extending its evening offering to offer people convenient dinner options could be a big winner in the coming years I reckon.
Could the price soar from here?
At the moment, Greggs sells on a price-to-earnings (P/E) ratio of 12.
If it can get into strong growth mode again, I reckon it could justify a P/E ratio in the high teens. That could mean a Greggs share price 50% or more higher than today.
But if earnings per share also grow enough, such a P/E ratio could mean the share price is actually double its current level.
Stores are currently growing sales, albeit fairly modestly. New shop openings will help. Opportunities like expanding the evening business could also boost earnings. On top of that, cost efficiencies such as centralising more production could help improve profitability.
With the risks I mentioned above, the Greggs share price might even fall from here.
But if the company executes its plans well, in years to come I see a credible case for it doubling. Meanwhile, it yields 4.2%.
The post Could the Greggs share price double in 5 years? 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.
