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It is fair to say that Greggs (LSE: GRG) shares had a mixed 2024. For much of the year, its value appeared to continue rising. But the sharp declines in October and November only managed to erase all those gains.
Fortunately, I sold my position in the FTSE 250-listed in the autumn as a takeaway food retailer for fear that its valuation seemed a bit frothy for what is actually a fairly simple, albeit high-quality, business.
But I still value the stock highly. And there are certainly some reasons to think that 2025 could be a better year for the sausage roll seller.
So is now the time to buy again?
not so tasty
To be clear, the Greggs' fall from grace was not due to a catastrophic swing in trade. In my opinion, it was all because market expectations did not correspond to reality.
During the first half of the year, the company revealed a 14% increase in total sales to almost £1 billion. Profit also rose just over 16% to £74m. Given these figures, it was no surprise that the share price rose.
However, the same stock was trading at a price-to-earnings (P/E) ratio in the low to mid-20s when, in early October, CEO Roisin Currie and company revealed that underlying sales growth had slowed in P3. At the time, economic uncertainty, weather, and unrest were blamed (yes, you read that right).
This news was never well received, even though the baker maintained his outlook for the entire year. At that type of valuation, the market clearly wanted a improvement to the orientation!
Since then, we have seen a slight recovery in the share price. But it is still almost 15% below the 52-week high reached in September.
Are better times ahead?
This stock's fairly significant drop leaves the stock trading at a much more palatable forecast P/E of 19 for FY25. That's still not what most investors would call a bargain. But it's also not ridiculously expensive for a highly profitable company with a vertically integrated supply chain network that has a strong brand and devoted following. There's also a 2.6% dividend yield that looks safe.
Given how competitive the prices of its treats are, there's also an argument to think Greggs shares could do well if (and that's an almighty “if”) inflation rebounds more than expected and the crisis of the cost of living continues.
On the other hand, it is worth remembering that Greggs faces paying higher National Insurance contributions for its 32,000 employees from April. This will increase annual costs by tens of millions of pounds. Could more investors head for the exits before this happens?
This is what I'm doing
A fourth quarter trading update will be presented next Thursday (January 9). Since buying (or selling) before events like this is potentially risky, I'll wait until I've read and digested it before deciding whether to add the stock to my portfolio again. Signs that the company finished 2024 strong, combined with that lower valuation, could force me to make the decision.
In the meantime, it makes sense for me to continue looking for other opportunities in the market that I wouldn't be able to take advantage of if I decided to keep my money on this old favorite.
