Greggs‘ (LSE: GRG) shares are on fire at the moment. Over the last year, they’ve risen nearly 30%.
So should I buy into the British food-on-the-go retailer for my portfolio? Let’s discuss.
Why is the price going up?
It’s not hard to see why the shares have done well. Recently, business performance has been strong. For the first half of 2024, for example, total sales came in at £906.6m versus £844m a year earlier. That represents year-on-year growth of 7%.
For a well-established food chain, that’s an impressive level of growth. It’s worth noting that on the back of this performance, the company increased its interim dividend by 18.8% to 19p per share.
Can it keep rising?
Of course, the big question is whether the price can keep rising from here. Is there scope for further gains? Looking at the business and its plans for the future, I think there is (in the long run).
This is a high-quality company with a well-known, trusted brand and a high return on capital (meaning it’s very profitable). And looking ahead, it plans to roll out a ton of new shops (it’s aiming for 140 to 160 net new shop openings in 2024).
If it can execute its growth strategy, the share price should continue to climb.
Is the stock cheap?
That said, the company’s valuation today could limit gains in the short term. At present, Greggs shares have a price-to-earnings (P/E) ratio of 23.4 using this year’s earnings per share forecast, falling to 21.3 using next year’s forecast.
I don’t think these multiples are unreasonable given Greggs’ quality. But they don’t leave much room for an upward valuation rerating. In other words, future gains are likely to depend on earnings growth.
One issue for me
Now, while I do see investment potential here, one issue for me is that I like to invest in companies that look set to benefit from powerful long-term trends. And I can’t really see a long-term trend that’s going to benefit Greggs.
It would be different if the company was focused primarily on healthy eating/salads like Tossed in London and Sweetgreen in the US (I actually think this is a really interesting theme and I’m looking for ways to play it).
Right now though, I’m struggling to see a trend that will provide tailwinds for the company in the years ahead. I also think the shift to healthy eating could present a risk for Greggs in the future. Looking at its menu today, there’s a lot of stuff that isn’t particularly healthy.
Don’t get me wrong – I love a steak bake and a doughnut as much as everyone else. But consumers’ preferences are changing and healthy eating’s definitely becoming more of a focus.
Better opportunities right now?
Given this issue, I’m going to leave Greggs shares on my watchlist for now.
I do think this company has appeal from a long-term investment perspective. However, it’s not quite the right fit for my portfolio at present.
This post was originally published on Motley Fool
