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Greggs (LSE:GRG) shares are up around 12% from where they were five years ago. That doesn’t sound like a lot given that the vast majority of the firm’s outlets were closed back then.
By the start of June 2020, a phased reopening of stores was underway. But investors might wonder whether the company is really worth only 12% more than it was in the depths of the pandemic…
Covid lows
Unsurprisingly, 2020 wasn’t a good year for Greggs in any shape or form. Revenues fell 30% from the previous year and the company reporting a loss in terms of operating profits.
Things are quite different now. Sales are well above their pre-pandemic levels, the firm has increased its store count, and profits reached record levels in 2024.
The balance sheet’s still in pretty good shape and while some companies issued equity to stay afloat, Greggs didn’t really do this. Despite this, the share price is still roughly where it was in 2020.
To my mind, that means (at least) one of two things is the case – the stock was badly overvalued back in 2020, or is significantly undervalued right now. And I think it might be a bit of both.
Valuation
Greggs had around 2,000 stores in 2020, but it had plans to grow this to 3,000. But even that leaves a lot of like-for-like sales growth required to justify a price-to-earnings (P/E) multiple of around 26.
To some extent, a high multiple’s justified. Outside something extreme as a pandemic, a business that sells baked goods at lower prices than the competition is one I expect to prove durable.
Nonetheless, I don’t see a good case for thinking the share price in 2020 wasn’t at least a bit ahead of the underlying company’s growth. But the situation today looks more than a little different. The stock currently trades at a P/E ratio below 14, which reflects a lot less in the way of long-term growth optimism. Though it’s also fair to say the company has less scope for expansion.
Outlook
Greggs currently operates just over 2,600 outlets, which doesn’t leave much room for growth before it hits the 3,000 target. So on this front it’s likely to be somewhat limited.
Since the pandemic however, the firm has increased its long-term target to “significantly more than 3,000 stores“. And that might make the equation much more favourable.
Some analyses have suggested Greggs could ultimately operate up to 4,500 stores. If it can achieve this, like-for-like sales don’t need to grow by much to make the current valuation look very attractive.
The share price hasn’t moved much in the last five years, but the underlying business is clearly in a stronger position. Given this, I think the stock’s undervalued at today’s prices.
A stock to buy?
A £10,000 investment in Greggs shares from the start of June 2020 is now worth £11,222. That’s not a great result, but a lot of that can be put down to the valuation at the time.
At today’s prices though, things look different. So whether the ambition is growth or passive income, I think the stock deserves to be on any investor’s list of shares to consider buying.
