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Greggs' (LSE:GRG) shares are in an interesting position at the moment. He FTSE 250 The stock is off to a poor start in 2025, falling 27% since the beginning of the year, but there's more to the story than this.
The company's growth prospects are no longer what they were and that is why the share price has fallen. But while that's true, the stock is trading at its lowest price-to-earnings (P/E) multiple in a decade and I think it's worth considering right now.
Growth
In theory, Greggs has two ways to increase its revenue. The first is by opening more stores and the second is by generating greater sales in the points of sale that it currently operates.
Most of the company's recent growth is due to the increase in the number of stores, which is not a problem in itself. But the problem is that you won't be able to keep doing this indefinitely.
Greggs estimates it can maintain around 3,000 places, but that is only 15% more than the current number. Therefore, the possibilities of further increasing sales on this front are limited.
The other strategy involves generating greater sales at your existing outlets. And the most obvious way to do this is by increasing prices, which should also increase margins.
However, this is risky for a company with a brand based on customer value. The company announced a couple of weeks ago that it was raising prices and its customers did not react well.
Whether they will actually look elsewhere remains to be seen (Greggs still offers the best value for money on the high street). But it is a risk that investors should consider carefully.
Worth
Greggs shares currently trade at a P/E multiple of 15. And with the exception of the Covid-19 pandemic, when its net income turned negative, this is the cheapest it has been in a decade.
Over the past 10 years, the stock has consistently traded at a P/E ratio of 16.5 or higher. That means if the stock returns to those current price levels, the share price could rise at least 15%.
However, I think the company's limited growth prospects make betting on this risky. Greggs has never had more stores and this means it has never been less likely to increase revenue by opening new outlets.
Instead, I see the underlying business as an opportunity. At current prices, I don't think it needs to do many things right for the company to generate good returns for investors.
Even if the number of stores does not exceed 3,000, that is 15% more than the current level. And if earnings grow at the same rate, the potential for dividends and share buybacks looks attractive to me.
In short, Greggs has gone from a growth stock to a value stock. Its share price now is largely justified by its existing cash flows, rather than those it could generate in the future.
Buy
Greggs may not be able to do much more than compensate for inflation by raising prices. But at current prices, I don't think it's necessary.
I'm looking to buy shares the next time I have cash available to invest. My hope right now is that the stock stays low long enough to give me a chance.
