Shares in FTSE 250 fast-food retailer Greggs (LSE: GRG) have enjoyed a meteoric rise over the past five years.
Powered by a seemingly insatiable demand for its steak bakes and sausage rolls, among others, the stock has soared 150% since then.
However, since their 20 September 12-month traded high of £32.24, the shares have lost 11%. So, does this represent a golden opportunity to buy into a Great British success story at a knockdown price?
Are the shares undervalued?
My first step to ascertain whether the shares are genuinely underpriced is to look at key stock valuation measures.
I usually start with the price-to-earnings ratio (P/E) and on this Greggs currently trades at 20.6. The average P/E of its competitor group is 25.1, so it looks significantly undervalued on that basis.
These peers consist of J D Wetherspoon at 17.9, Whitbread at 19.5, McDonald’s at 26.8, and Mitchells & Butlers at 36.1.
Greggs looks even more undervalued on the key price-to-sales ratio (P/S). It presently trades at 1.5 compared to its competitors’ average of 2.9.
So the shares do indeed look underpriced to me at their current £28.69 level.
How do recent results look?
Third-quarter results evidently disappointed many investors as the share price fell 5% when they were released on 1 October.
I thought the market reaction was way overdone. Yes, like-for-like sales in the period were lower than the 7.4% rise in H1. But they were still up 5%! The period also coincided with rioting in several locations serviced by Greggs, as it highlighted in the results report.
The firm has also managed to open a net 86 shops year-to-date and is on track to open 140-160 in total this year.
Its H1 results showed underlying pre-tax profit up 16.3% to £74.1m, with total sales up 13.8% to £960.6m. Underlying diluted earnings per share rose 15% over the period to 53.8p.
A risk for Greggs is a resurgence in the cost-of-living crisis that might dent its customer spending over several quarters.
However, consensus analysts’ estimates are that its earnings will grow by 7.5% every year to the end of 2026.
Will I buy the shares?
I have focused on buying undervalued high-quality, high-yielding shares since I turned 50 a while back. The aim of this is to generate sufficient dividend income for me to continue to reduce my work commitments.
Greggs is certainly undervalued as far as I am concerned, so it meets the first criterion. It is also high-quality, with good earnings growth both behind and ahead of it, I think – so it meets the second one too.
It is on the third where it falls down for me. Last year, it paid a total dividend of 102p, including a special payment of 40p. With this included, it yields 3.6% on its current £28.69 share price. Excluding this payment, it yields 2.2%.
Analysts forecast that the yield will rise to 2.7% in 2025 and to 2.9% in 2026, excluding special payments.
This is nowhere near the 9% average annual yield I receive from my core high-yield stocks. So Greggs is not for me at my present phase in the investment cycle.
However, if I were at an earlier stage – even 10 years younger – I would buy it for its excellent growth prospects and significant undervaluation.
The post Down 11%, is now the time for me to buy this once hotly-favoured FTSE 250 growth stock? appeared first on The Motley Fool UK.
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Simon Watkins 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.
