Greggs (LSE: GRG) shares have been a fabulous investment over the long term. Over the last 10 years, they’ve risen about 475% and also paid regular dividends.
Should investors consider buying them for their Stocks and Shares ISAs today? I think so. Here’s why.
A great business
Whenever I analyse a company, I look at its ‘quality’ before zooming in on the valuation.
I ideally want to see a strong competitive advantage, a solid level of growth, a high level of profitability, and a robust balance sheet.
Over the long term, companies with these attributes tend to be good investments, even if their valuations are a little high to begin with.
If you are a long-term investor, buying shares in a good business is more important than valuation.
Fundsmith Equity portfolio manager Terry Smith
Looking at Greggs, it ticks a lot of boxes on the quality front.
Its strong brand is a competitive advantage. Across the UK, people know Greggs well (it’s the leading food-to-go brand according to YouGov‘s Brand Index). And the brand has become synonymous with good-value takeaway food.
As for growth, it’s impressive. Over the last five years, Greggs’ revenue has climbed about 80%. This year, City analysts expect top-line growth of about 12%.
Return on capital employed (ROCE) – a key measure of profitability – is also impressive. If we exclude the 2020 pandemic year, it averaged 22% between 2018 and 2023. This means the company has a lot of profits to compound.
Finally, the company has a solid balance sheet that should support its growth strategy.
Overall, I see Greggs as a very good business.
Not cheap though
Now, looking at the valuation, the shares aren’t particularly cheap today.
At present, analysts expect Greggs to generate earnings per share of 134p this year and 149p in 2025. So, at today’s share price, the forward-looking P/E ratio is about 21, falling to 19 using next year’s earnings forecast.
These earnings multiples are well above the market average. However, they’re not unreasonable given the quality of the company, in my view.
I think the shares are capable of generating solid returns going forward, despite this above-average valuation.
It’s worth noting that the dividend yield is about 2.4% today. This could help to boost returns.
Worth buying?
Of course, there are risks to consider with a food-on-the-go company like this.
One is market saturation. Greggs is already on a lot of high streets across the country. I have two within a five-minute walk of my house! Can it keep expanding at the same rate as in the past?
Another is consumer tastes and preferences. We keep hearing about how GLP-1 weight-loss drugs like Wegovy are changing eating habits. Could these drugs have an impact on demand for steak bakes and doughnuts? Possibly.
All things considered though, I believe this stock has a lot of appeal. I think investors should consider buying it today.
The post Greggs shares: a tasty option for a Stocks and Shares ISA today? appeared first on The Motley Fool UK.
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Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has recommended Greggs Plc and YouGov Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may 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 diverse range of insights makes us better investors.
