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At first glance, Greggs (LSE: GRG) looks like a real bargain to me. But the share price lost 25% a year – again still many investors bet against Greggs shares by ‘shorting’ them. That means they are selling futures contracts for Greggs shares now (which they probably don’t have) in the hope that they can buy them even cheaper in the future.
As an investor rather than a speculator, deficits are not my game. But the amount of so-called smart money missing Greggs shares made me wonder if I’m missing something here.
Part of the road to success as an investor, after all, lies in looking honestly at the risks involved in investing, not just the potential rewards.
Gregs faces many challenges
In fact, there are few risks in the Greggs investment case at the moment, as far as I can see.
The sausage roll maker has built its business thanks to people who love great value snacks and sugary fare. But appetite suppressants can kill business.
With thousands of stores, customers can get tired of Gregs. If regular customers start buying even more of their lunch elsewhere, that can be detrimental to revenue and profitability.
For many of its employees, Greggs has been facing a higher bill due to rising National Insurance rates and wage rates. It has gone through a price hike recently. While modest, that increase may still make some shoppers think twice before buying.
Last summer’s unexpected profit warning based on a mismatch between products and weather again raised doubts in my mind about the quality of Greggs’ current management.
Demand planning for a retailer with a small number of product lines, such as Greggs, should be the basics to get right.
Here’s why I’m stuck
But while the risks are real, I think it’s important to keep perspective.
Coming to this from the first principles, people need to eat. For many workers or those who travel, they want an option to eat without preparing themselves, but they want a good value.
What are their options?
Compared to fast food providers, Greggs can be seen as a relatively healthy offering. The price is attractive and the large network of stores means that it is often an easy place to get to.
Although the variety is limited, I think it feels like there are more options at Greggs than at other fast food competitors.
Over decades in business, Greggs developed his own business model, emphasizing efficiency and building economies of scale. It has successfully created a brand that is now a staple for many people when it comes to eating fast and cheap food.
This looks like a good price
Given that, I think a price-to-earnings ratio of 12 looks like a good value for Greggs shares.
I see Gregs as a solid company that deserves a high share price and I hope that will happen over time.
I can see the danger. But I think the current share price already gives me a margin of safety considering them.
I plan to hold on to my Gregs shares.
