Shares in Greggs (LSE:GRG) have been falling as if a Chinese AI lab has launched a more powerful steak bake built at a fraction of the cost. The FTSE 250 stock is down 24% since the start of the year.
As a result, the stock has been attracting the attention of investors – and rightly so, in my view. But there’s another household name for UK investors that’s higher on my buy list at the moment.
What’s wrong with Greggs!?
There’s not much wrong with Greggs as a business. But its recent results make me question its growth prospects.
Like-for-like sales have been growing at 2.5% – barely keeping up with inflation. And the firm’s store count is close to its target of 3,000, so the scope for opening new outlets is likely to be limited.
A price-to-earnings (P/E) multiple of 16 doesn’t reflect much in terms of optimism about future growth. And the value Greggs offers customers should have a durable appeal.
Investors who consider the stock today could have the chance to do well over the long term. But I don’t see it as the most attractive FTSE 250 opportunity right now.
WH Smith
That honour goes to WH Smith (LSE:SMWH). The firm looks like an unattractive high street retailer, but there’s a lot more beneath the surface – and that’s what I like about it.
The company actually reported its earnings for the 21 weeks leading up to 25 January this morning (29 January). Overall revenues were up 3%, but this doesn’t tell the full story.
I think WH Smith’s high street business is – in a word – bad. As far as I can tell, it mostly sells items that people can buy more cheaply either in the nearest Tesco or online at Amazon.
I don’t like the prospects of these outlets and the fact their revenues are declining at 6% per year reinforces this view. But this is only one part of the company’s overall business – and a small one at that.
A quality business
WH Smith’s high street retail division accounts for less than 25% of total revenues. And the firm announced recently that it’s exploring options to divest this.
That leaves the travel part of the business. This operates stores in airports, train stations, and hospitals – places where competition is limited and e-commerce is a non-issue.
These outlets are vulnerable to fluctuations in travel demand, which is a risk with the company. And that’s something to consider, but the growth in this part of the business is very impressive.
This segment of WH Smith’s operation is growing revenues at 7% and it generated profits of £189m in 2024. On this (pre-tax) basis, the current market cap implies a P/E ratio of around 8 – which is very low.
UK stocks
Officially, shares in WH Smith are trading at a P/E ratio of 22. But that’s because one-off costs in the high-street business are offsetting the profitability of the travel division.
If the firm divests its high street stores, this could well change. And with strong growth plus scope to open new outlets — especially in the US — I think the stock is a more attractive one to consider than Greggs right now.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Stephen Wright has positions in Amazon. The Motley Fool UK has recommended Amazon, Greggs Plc, Tesco Plc, and WH Smith. 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.
