Is Greggs share price becoming a joke after another 11% rise in the last month?
It seems as if nothing can Greggs (LSE: GRG) share price. The FTSE250 The stock is up 60% in two years, 30% in one year, and 11% in the last month.
Hungry Brits can’t get enough of the company’s sausage rolls, steak casseroles and doughnuts, and investors can’t resist its red-hot share price.
Greggs has also given us a masterclass in marketing. Its fat offer used to be a joke, and a snobbish one at that. Then suddenly Greggs was there. And so was everyone else. Its vegan sausage roll went viral.
FTSE 250 star on the rise
Greggs has street cred. My college-going daughter loves her basketball shorts with the Greggs logo. Her friends get the joke, too.
And the best part: It’s an affordable joke. At the posh chain Gail’s, I get a sausage roll meal with potato wedges and a smoothie for the price of a bagel. Both brands have boomed despite the cost of living crisis, but for very different reasons.
The greatest irony is that while food is cheap, Greggs shares are not. Today they trade at 23.65 times earnings. That’s almost double the FTSE 250’s average price-to-earnings (P/E) ratio of 12.4. Two years ago they traded at just 15.54 times. So is the joke here a bust?
The stock is attracting above-average interest for a simple bakery chain with a market capitalisation of just over £3 billion. Naturally, stocks that are doing well attract more attention and Greggs shares have done very well. But is the cult surrounding Greggs partly to blame?
The company has started 2024 well, with adjusted pre-tax profits up 16% to £74.1 million in the first half of the year. Total revenues rose almost 14% to £960.6 million. And it’s not just about selling sausage rolls. Flatbreads, pizza and iced drinks are driving growth.
Management has set a target of increasing the total number of stores from around 2,500 currently to 3,500. This will not happen overnight. A net increase of 140 to 160 new stores is expected this year. This offers a solid, long-term opportunity for sales growth. Greggs closes low-revenue stores quickly, which protects margins.
Steaming hot broth
Greggs isn’t just targeting the high street. The company is also opening branches in train stations, airports, supermarkets and shopping centres. And opening in the evenings potentially represents a huge untapped growth opportunity. It’s the ideal place for a late-night snack.
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 the soaring share price. Management has just increased the interim payout by 3p to 19p per share. That’s a whopping 18.75% increase.
There is a danger that when people have more money in their pockets they will switch to Gail’s and the others. However, if that happens I wouldn’t be surprised if Greggs upgraded too. That’s just how it goes.
Another danger is that the joke will eventually get old. There is a lot of growth built into Greggs’ share price today. If sales fall, that could take a hit, but then I’d be keen to buy.
I won’t be buying Greggs shares at today’s price. I’ll be looking for a better value stock to sink my teeth into. But this is a well-run company with plenty of growth potential. Ultimately, the joke might be on me.
The post Up another 11% in the last month – is Greggs share price becoming a joke? appeared first on The Motley Fool UK.
Further reading
Harvey Jones does not own any of the stocks mentioned. The Motley Fool UK has recommended Greggs Plc. The views expressed on companies mentioned in this article are those of the author and may therefore 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 broad range of insights makes us better investors.
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