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Few companies have grown as quickly as Greggs (LSE: GRG) has been trading on the market lately. The purveyor of sausage rolls and vegan alternatives has seen its share price soar by almost 30% over the past year. So is this high street hero running out of steam or is there still room for growth?
Impressive growth
The company has come a long way from its humble beginnings as a Tyneside bakery. Today, it is a FTSE 250 Index A powerhouse with a market capitalisation of £3.24bn, the transformation from a local favourite to a national brand has been nothing short of remarkable, driven by clever marketing, product innovation and an uncanny ability to tap into changing consumer tastes.
Let's crunch some numbers. The impressive recent run has pushed the company's price-to-earnings (P/E) ratio to 23.3 times, suggesting that investors are willing to pay a premium for a slice of this baking heaven.
What is driving this growth? Management has been able to expand its market share across several sectors, moving from a lunchtime stop-off point to an all-day dining destination. The potential introduction of iced drinks could drive incremental volumes in the short term, with a strong contribution to earnings due to the VAT exemption.
Additionally, a vertically integrated supply network, with its own bakeries and delivery system, gives it a significant advantage in controlling costs and maintaining quality across the country. This operational efficiency has allowed it to navigate the turbulent waters of inflation and supply chain disruptions much more smoothly than many of its peers.
Some concerns
However, it is not all a bed of roses in the land of baked steaks and sausage rolls. Management has identified some challenges that could slow down its rapid rise. The company has highlighted a “challenging market” slower future inflow trends, which could impact future growth.
Although annual earnings are expected to grow at a steady 7.7% over the next three years, gross margin is reported to be “structurally different” to pre-pandemic levels. Although it has only fallen from 8.1% to 7.1% in the past year, investors may be nervous about the possibility of further declines in the long term.
On the one hand, management has demonstrated an impressive ability to adapt to changing consumer preferences and navigate difficult economic conditions. Strong brand recognition and efficient operations provide a solid foundation for future growth.
On the other hand, the current valuation suggests that much of this potential is already built into the share price. At a price-to-earnings ratio of 23.3 times, the company is hardly a bargain bin, and any stumble in execution could lead to a steep decline.
I'm looking elsewhere
Greggs has proven to be more than a flash in the pan, having grown from a regional bakery into a national takeaway powerhouse. While the company’s growth story is impressive, I believe investors should approach it with a balanced perspective. The potential for further expansion and product innovation is tempting, but the high valuation and potential market challenges suggest caution.
I suspect this high street giant will be with us for some time to come, but I think Greggs shares might be fairly accurately priced at the moment. I think there are better opportunities elsewhere, so I'll let it slide for now.
