The Greggs (LSE:GRG) share price fell 4% on Tuesday October 1st after the company’s latest update. But the news around sales growth, cost inflation, and the outlook for the full year is reasonably positive.
Greggs has been one of the best-performing UK stocks over the last decade. So does that mean there’s a rare opportunity to consider buying shares in the FTSE 250 bakery chain?
Buying opportunities?
Over the last 10 years, Greggs shares have outperformed just about every major index. If I’d invested £1,000 in the stock back in 2014, my investment would be worth £5,106 today.
During that time, though, obvious buying opportunities have been rare. Outside the pandemic, it’s been a challenge to find the stock trading at a price-to-earnings (P/E) multiple below 17.
There are a couple of lessons for investors there. One is that paying a fair price for a truly great business can be a terrific investment.
The other is that it’s important to seize opportunities when they present themselves. So with the stock falling, it’s worth looking more closely at the latest trading update to see what’s going on.
Trading update
It’s hard to see much to dislike in the latest report, but I think the key is sales growth. Total sales in the third quarter were 10.6% higher than the year before and like-for-like sales were up 5%.
Those are undeniably positive numbers, but context is everything. Since the start of the year, total sales have grown 12.7% in total and 6.5% on a like-for-like basis.
That means sales have been growing more slowly in the last quarter. And for a stock like Greggs – which is priced to reflect expectations of growth– that’s not what investors are looking for.
Despite this, management maintained its guidance for the full year. The question for investors, though, is what the longer-term outlook is like for the business.
Outlook
Greggs is aiming for 3,000 outlets and is making good progress with this. It’s worth noting, though, that the incremental effect of adding more stores decreases as the company grows.
Over the long term, I expect growth to be driven by the firm’s ability to (a) sell more stuff and (b) increase prices. And I think the second of these should give investors cause for optimism.
With low prices, small increases can make a big difference to profitability. Taking the price of a steak bake from £2 to £2.10 generates 5% more revenue at zero extra cost.
Of course, there’s always a chance high prices deter consumers, but I think the risk of this is limited when increases are small in absolute terms. And this makes me optimistic going forward.
Is this a buying opportunity?
As I see it, Greggs has clear opportunities ahead. But the market’s reaction to the latest trading update should give investors a clear sign of what can happen if the growth rate slows.
Expanding to 3,000 outlets is a clear growth avenue in the short term. After that, I think the key question is how much the company can use its pricing power to keep moving forward.
It’s not obvious to me that this is enough to justify a forward P/E ratio of 21 today. So I see the stock as a decent opportunity to consider buying, rather than an outstanding one.
The post The Greggs share price falls as sales keep growing. What’s going on here? appeared first on The Motley Fool UK.
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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Greggs 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.
