MIDAS SHARE TIPS: Greggs is looking tasty in the cost of living crunch


 

MIDAS SHARE TIPS: In light of third-quarter update, Greggs’ current trajectory and value is looking tasty in the cost of living crunch

Midas last looked at Greggs in March 2021, when we advised those who had followed our earlier tip to take some profits. 

The shares were riding high at £24.98, and though Greggs was back on a (sausage) roll after the pandemic, those who had bought in at the equivalent of £3.95 back in 2009 when we recommended the stock were sitting on some sweet increases. 

Today, with the shares back at £17.70, those who took our advice will be grateful – but it is now worth considering the company’s current trajectory and value, especially in the light of this week’s third-quarter update. 

On a roll: Greggs sales are up, and the baker plans to open 150 new stores as low prices tempt customers

Most of us are familiar with the Greggs story. From humble Newcastle beginnings as a baker in Tyneside, the business has become a British institution, with the number of outlets in the UK far outstripping McDonald’s. The company’s icon status has been cemented by the fact that you can find a glitzy Greggs in a prime position in London’s Leicester Square, and wear Greggs branded clothes from Primark. 

While there’s something comforting about the fact that so many of us prefer to munch on a sausage roll, steak bake or breakfast pastry rather than a Big Mac, the company has evolved for changing British tastes as well. Innovations include the vegan sausage roll, which has now been joined by a vegan sausage melt and a toastie. Meanwhile the company is also offering increasing amounts of hot food and opening later. 

You can probably guess at most of the clouds on Greggs’ horizon. A cost-of-living crisis will force more of us to eat at home, while the continued tendency for work-from-home post pandemic also hits outlet sales in traditional office locations. 

Then there’s price inflation, which the company must either absorb or pass on to consumers, bringing difficulties in either case. 

Against this backdrop, the third-quarter update was good news. Sales were up 15 per cent in the 13 weeks to October, and the company has increased the number of stores by 90 since the beginning of 2022. It expects to have 150 more than on January 1 by the end of the calendar year. 

Although the Queen’s funeral hit sales, the company indicated it was still on track to hit targets. Chief executive Roisin Currie was upbeat on cost pressures too. Although she’s forecasting nine per cent cost inflation, she says the company holds ‘an appropriate level’ of food purchasing cover and that energy costs for the business will be below the recently announced price cap. 

The company has pushed through two price rises without consumer behaviour changes, thanks in part to its position at the lower end of the price scale. Sweet-toothed analysts welcomed the update. Andrew Wade, at Jefferies, praised the company’s ‘impressive resilience’, while Ben Hunt at Investec and Russell Pointon at Edison both pointed out that the shares are cheap compared with historic averages.

MIDAS VERDICT: It’s hard not to feel good about Greggs. A genuine British success story built on our love for flaky pastry and uncomplicated hot drinks is enough to make you smile every time you see a TikTok teenager sporting a Greggs-branded bucket hat. 

In investment terms, too, the story is compelling. While Pret is off the menu for many cash-strapped Brits, Greggs has a more affordable image, and there is space for it to grow by increasing the number of delivery outlets, opening later and offering dinner, and opening stores in underserved areas. 

That brings the decision down to valuation, and that is looking toothsome too. On this year’s full-year earnings, Greggs trades on a price/earnings ratio of 15 and the yield is over 3 per cent. Historically, the ratio is over 17 times. Worth a nibble. 

Traded on: Main market Ticker: GRG Contact: 0191 281 7721 or corporate.greggs.co.uk 

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