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I bought some shares in Greggs (LSE: GRG) earlier this year. Since then, my Greggs shares have been a bit up and a bit down at different points, but nothing spectacular.
My reason for buying them was because I thought they looked like a possible bargain at their price. So as they are still selling at a price close to what I thought was a bargain, should I buy more?
Avoiding a common mistake
Before getting into the specifics of the Greggs investment case, I will pause to flag up a potential error common to many investors (including myself). When we buy a share and it stays cheap – or gets even cheaper – it can be easy to think that other investors are missing a great bargain opportunity and we ought to double down.
Maybe they are. But what if they are not? After all, a share may seem cheap to me because I am not paying attention to information other investors are, or I am judging things differently to them.
That could turn out to be a lucrative difference of approach – or it could involve me throwing good money after bad. This is more or less the mistake I made with my holding in boohoo, which later turned out to be a real dog. So might I be making the same mistake with Greggs shares?
Solid business performance
It is possible. One reason Greggs shares fell 29% over the past year is concern about the impact on profits of higher wages and taxes in recent months. It remains to be seen what long-term impact they will have on the company’s bottom line. It could be significant.
In a trading update released Wednesday (2 July), the baker warned that “in light of the current trading conditions“, full-year operating profits could be “modestly” below last year’s. That is concerning, especially as it suggests profit margins are being squeezed. First half sales grew 7% year-on-year, so as an investor I would have hoped operating profits would also be moving up.
Another risk this summer is the weather. While scorching days may be what some people dream of, they lend themselves better to an ice lolly or cool drink than to a hot steak bake. A warm summer could actually have a cooling effect on sales. Indeed, the trading statement said that very high temperatures last month meant fewer customers walk through its doors.
Still, do risks such as those justify Greggs shares selling for 13 times earnings?
The company has an iconic brand and network of shops in the thousands. It plans to expand that, hopefully boosting its economies of scale. A range of unique products and effective marketing techniques have also built a loyal following for the baker. It has a proven business model, growing sales last year by 11% to over £2bn.
I reckon the company’s proven retail formula should be able to keep it earning for years or decades to come.
Based on what I see as the attractive long-term prospects for the business, I continue to think Greggs shares are undervalued. If I have some spare money to invest this summer and can pick them up at a similar price to now, I will happily tuck some more into my portfolio.
