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Greggs (LSE: GRG) shares are among the most watched across the board FTSE 250. I’ve always thought that brand recognition plays a big role in this. Everyone has an opinion about Greggs, both negative and (increasingly) positive.
The bakery chain was a bit of a cult in the North-East, thanks to its Newcastle roots, but a joke elsewhere. PR masterstrokes like vegan sausage rolls changed that, heating up what would have been an old brand. The cost of living crisis helped, providing people with cheap medical care in difficult times.
Does this FTSE 250 stock still have sizzle?
Greggs gave the meat its marketing strategy with its cheap expansion plans. The management intends to increase the number of stores from 2,500 to 3,500, not just on the main street. It targets train stations, airports, malls, and retail parks, while checking for evening openings.
Management maintains high margins by quickly closing locations that aren’t pulling their weight. But did it just hit a wall?
I said when I looked at the Greggs share price The Motley Fool on August 23, it was still red hot. First-half sales rose 14% to £960.6m. It also came out with new product lines including flat breads, pizzas and soft drinks.
I had £3,000 sitting in my trading account but I didn’t buy Greggs. The stock looks undervalued, trading at a price-to-earnings ratio (P/E) of 23.65. That was nearly double the FTSE 250’s then average of 12.4 times. So it’s not really cheap. I was worried that too much growth was baked in, and while Greggs looked good to go, he was vulnerable to bad news.
My fate in the last three months? “I’ll look for a better stock to sink my teeth into. But this is a well-run business with pockets of growth potential. In the end, the joke might be on me.”
This growth stock still has bite
But for once, it wasn’t. Since then, Greggs shares have fallen from 3,176p to today’s price of 2,700p. That’s a 15% decrease. If I had invested my £3k it would be £2,550 today. So I will be down £450.
Naturally, I’m glad I avoided that fate, but what went wrong with Gregs? The decay began with a poorly received Q3 update on October 1, as sales growth slowed. Most companies would appreciate an increase of 10.6%, but this is down from the first half’s growth of 13.8%.
The board is on full-year guidance and is counting on new openings and new products to drive sales. But on October 30, the Budget faced yet another atrocity. National employer’s hike insurance and the minimum wage will hit Gregs hard, with more than 32,000 workers.
The nine analysts providing one-year share price forecasts remain bearish, setting an average target of 3,314p. If so, that would mean an increase of just over 22%. Although there is a wide range of predictions, from 4,040 to just 2,400. There is also a subsequent yield of 2.30%.
However, with a P/E of 21.38 times, I don’t think it’s in the bargain right now. And that NI raid hasn’t hit yet. I’m not ready to subscribe to Gregs cult yet. But I’ll keep watching.
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