It seems like nothing can stop the Greggs (LSE: GRG) share price. The FTSE 250 stock is up 60% over two years, 30% over one year and 11% over the last month.
Hungry Britons can’t get enough of its sausage rolls, steak bakes and doughnuts, while investors can’t resist its red-hot share price.
Greggs has also treated us to a masterclass in marketing. Its fatty fayre used to be a joke, and a snobbish one at that. Then suddenly, Greggs was in on it. And so was everybody else. Its vegan sausage roll went viral.
FTSE 250 star turn
Greggs has street cred. My student daughter loves her Greggs-branded basketball shorts. Her friends get the joke too.
Best of all, it’s an affordable joke. I can get a sausage roll meal deal with potato wedges and a smoothie for the price of a bagel from posh chain Gail’s. Both brands have boomed despite the cost-of-living crisis, but for very different reasons.
The supreme irony is that while the food is cheap, Greggs shares are not. Today, they trade at 23.65 times earnings. That’s almost double the FTSE 250 average price-to-earnings ratio (P/E) of 12.4 times. Two years ago, they traded at just 15.54 times. Is this where the joke turns sour?
The stock generates outsized interest for a no-frills bakery chain with a market cap of just over £3bn. Obviously, shares that do well attract more attention, and Greggs shares have been doing very well. But is the cult of Greggs partly to blame?
It’s made a good start to 2024, with first-half underlying pre-tax profits up 16% to £74.1m. Total sales jumped nearly 14% to £960.6m. And it’s not just selling sausage rolls. Flat breads, pizzas and iced drinks are driving growth.
Management is aiming to lift its total net branch numbers from around 2,500 today to 3,500. That won’t happen overnight. It’s aiming for a net increase of between 140 and 160 new shops this year. This offers a solid, long-term revenue growth opportunity. Greggs is swift to close underperforming outlets, which protects margins.
Steaming hot stock
Greggs isn’t just targeting the high street. It’s opening in stations, airports, supermarkets and retail parks. And it may have a huge untapped growth opportunity in evening openings. It’s the ideal place for late-night munchies.
There’s a dividend too. The trailing yield of 1.96% is below the FTSE 250 average of 3.15%, but that’s partly due to its rip-roaring share price. Management just lifted the interim payout by 3p to 19p per share. That’s a tasty 18.75% increase.
There’s a danger that when people have more money in their pockets, they’ll upgrade to Gail’s and the rest. Although if that did happen, I wouldn’t be surprised if Greggs upgraded too. That’s how it rolls.
Another danger is that the joke grows stale. There’s a lot of growth priced into today’s Greggs share price. If sales slip, it could take a beating but that’s when I’d ideally like to buy it.
I won’t buy Greggs shares at today’s price. I’ll look for a better value stock to sink my teeth into. But this is a well-run business with bags of growth potential. Ultimately, the joke could be on me.
This post was originally published on Motley Fool
