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In the past year, Greggs (LSE: GRG) has been far from a great stock market performer. Greggs share price has fallen by 23% in just 12 months.
It is down 51% since the end of 2021. But I’ve been buying the share, because I think it’s undervalued and could recover significantly in the coming years.
In fact, I think it’s possible twice in value over the next five years.
Why did Gregs fall
Before I start with my reasons for optimism, what went wrong with Gregs?
Understanding that is important. For Greggs’ share price to rise significantly, I think the company will need to show strong progress on all or some of the issues that have been affecting the City.
With around 33,000 employees, rising National Insurance and wage costs are a key issue for the company.
A misjudgment of the product range in the summer led to a profit warning. That undermined confidence in management and also raised the question of how valuable Greggs’ product offering is to its customers. That concern has been exacerbated by the increasing use of weight loss drugs.
That includes broader concerns about whether Gregs is starting to reach the limit of its growth potential. With thousands of stores already, sales growth is driven by new store openings in addition to same-store sales growth.
But there is a lot of white space for new stores before Greggs reaches a full foothold in the UK market.
I still see a lot here
Still, while I see some of those risks as big, I think the big picture here is always positive.
Greggs has proven its business model over the decades.
It enjoys great economies of scale and national brand awareness.
Good value never goes out of style, including when the economy is struggling and consumers are price sensitive. So I think the business has continued potential to do well.
Growth can bring efficiency, helping to increase income. Meanwhile, Greggs’ value proposition and proven marketing skills can help sales grow, as they have in the past.
The existing store also offers opportunities for growth.
Gregs has historically been seen as a place for lunch or as a place to go for breakfast, but expanding their evening offering to give people more available options for dinner would be a big winner in the coming years I think.
Can the price go up from here?
Currently, Greggs trades at a price-to-earnings (P/E) ratio of 12.
If it can get into strong growth mode again, I think it can justify a P/E ratio in the high teens. That would mean Greg’s share price is 50% or more than today.
But if earnings per share also grow sufficiently, such a P/E ratio would mean that the share price is actually double its current level.
The stores are currently growing sales, albeit modestly. The opening of new stores will help. Opportunities such as expanding the evening business can also increase earnings. In addition, cost efficiencies such as increased production integration can help improve profitability.
With the risks I mentioned above, Greggs’ share price could go down from here.
But if the company executes its plans well, in the coming years I see a credible case that it will double. Meanwhile, it yields 4.2%.
