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FTSE 250 fast-food retailer Greggs (LSE: GRG) passed the milestone of £2bn in sales in 2024.
Aside from this 11.3% year-on-year sales increase (to precisely £2.014bn), its 9 January Q4 results saw a record 226 new shops opened. Another 140-150 net new store openings are planned for 2025 to add to the total of 2,618 currently trading.
The purveyor of several of the UK’s most moreish culinary treats, in my opinion, added that supply chain capacity development is on track. This supports these ongoing plans for growth.
A risk to these is intense competition in the food retail sector.
That said, analysts forecast Greggs’ earnings will grow by 4.5% each year to the end of 2027. And it is ultimately these that drive a firm’s share price and dividend higher.
So why are the shares down?
The stock fell 15% after the Q4 figures as they missed forecasts for a 2024 year-on-year sales rise of 12.2%.
As a former investment bank trader, I understand that part of the share price reflects such forecasts. However, my approach as a private investor over many years has been to take a long-term view.
In my experience, the longer an investment is held, the greater the chance it has to recover from short-term market shocks.
Consequently, when I look at Greggs’ performance numbers I think there is a bargain to be had.
Are the shares now significantly undervalued?
The first part of my assessment of Greggs’ pricing is to compare its key valuations to those of its competitors.
On the price-to-earnings ratio, the shares currently trade at 16.5 against a peer group average of 20.2. This comprises J D Wetherspoon at 14.7, Whitbread at 21.4, and McDonald’s at 24.4. So, it looks very undervalued on that basis.
I think it apposite to note here that Greggs overtook McDonald’s as the UK’s top takeaway for breakfast in 2023. And it retains that number one position.
Greggs also looks very undervalued on the key price-to-sales ratio, trading at 1.2 compared to a competitor average of 3.3.
However, on the price-to-sales ratio, Greggs looks slightly overvalued at 4.6 against its 3.8 peer average.
To get to the bottom of its valuation, I used the second part of my pricing assessment methodology. This involves examining where a stock should be, based on its future cash flow forecasts.
The resulting discounted cash flow analysis shows Greggs’ shares are technically 62% undervalued at their present £20.47.
So a fair value for them is £53.87, although market vagaries might push them lower or higher.
Will I buy the stock?
I am at the later stage of my investment cycle, aged over 50 now. This means that the length of my market view has contracted to around 10 years from the previous 40.
My focus now is on shares that will generate for me a very high passive income from dividends.
Analysts forecast Greggs’ yield will be 3.2% in 2025 and 3.9% in 2026. By comparison, the average yield of the FTSE 250 is presently 3.3%.
However, the average yield of my passive income stocks is nearly 9%. So, Greggs is not an unmissable buy for me.
That said, if I were in the early stages of my investment cycle, I would buy it for its growth potential and major undervaluation.