Under £17 now, here’s why I think Greggs shares are a steal anywhere below £31
Greggsâ (LSE: GRG) shares are down 24% from their 21 May one-year high of £22.02. But I think this is way out of sync with the strength of the underlying business.
This features steady growth, resilient demand, and a major brand in the UK food-on-the-go market. These factors underpin robust earnings growth forecasts that could drive the shares much higher over time.
So, where should the stock be trading, in my view?
Earnings growth
A risk to Greggsâ earnings is the intense competition in the sector, which could squeeze its margins. Nonetheless, analysts expect earnings to grow by an annual average of 7% to end-2028.
Its 2024 results showed record sales of £2.14bn and record profits of £203.9m. It overtook McDonaldâs as the UKâs top breakfast takeaway in 2023 and has retained that position.
Its H1 2025 update saw sales rise 6.9% year on year to £1.03bn. And its Q4 results saw sales up 7.4%.
A bargain relative to peers?
To gauge whether Greggs is undervalued, I started by comparing its key valuations with those of its competitors.
At a price-to-earnings ratio of 11.5, Greggs sits in the middle of a hospitality peer group, which averages 16.2. This includes Mitchells & Butlers at 9, JD Wetherspoon at 10.6, Whitbread at 18.4, and McDonaldâs at 27.
So, on this measure, it looks undervalued. The same is true of its 0.8 price-to-sales ratio, compared to its competitorsâ average of 2.8.
Over and above this, there is a structural problem with all relative (between companies) valuations to factor in. A sector-wide over- or undervaluation can obscure whether one company is genuinely cheap or expensive.
The UK consumer discretionary sector — where Greggs sits — is trading at a 15%-25% discount to its three-year average. So, several companies in it are likely more undervalued on a standalone basis than they appear from headline numbers.
Whatâs Greggs really worth?
To get to the bottom of Greggsâ true value, I ran a discounted cashâflow (DCF) analysis. This estimates âfair valueâ by projecting future cash flows and discounting them back to today.
This provides a clean, standalone valuation that is not distorted by whether the wider sector is over-â or undervalued.
In Greggsâ case, I used a discount rate of 9.4%, and a perpetual growth rate of 3% (the five-year average UK 10-year gilt yield). The model also factors in the analystsâ consensus earnings growth forecasts for Greggs of 6.8% a year. Other DCF models may use different inputs, which could produce lower valuations.
However, based on these numbers, my modelling suggests Greggs shares are 46% undervalued at their current £16.74 price.
That implies a fair value of £31 — approaching double where the stock trades today.
Thus gap between price and value is important, as asset prices tend to converge to their fair value over time. So it suggests a potentially terrific buying opportunity to consider if those DCF assumptions hold.
My investment view
Over 50 now, I prioritise shares with much higher dividend yields to help fund my retirement, and Greggsâ modest 4.1% payout does not fit that strategy.
Even so, the valuation gap and long-term growth outlook make it a stock many investors may want to consider.
The post Under £17 now, hereâs why I think Greggs shares are a steal anywhere below £31 appeared first on The Motley Fool UK.
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More reading
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Simon Watkins 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.
