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Warren Buffett taught the world that wealth can be made by investing in simple businesses. I think he would agree that this is a FTSE 250 company that almost all of us can understand. As famous investor Peter Lynch once said: “Invest in what you know.” Fortunately, I think we all know Greggs (LSE:GRG) if we live in Great Britain.
From past returns to future profits
Over the last 10 years, Greggs has achieved an annual return of almost 44% on average, placing it at the top of the 250 companies in the group.
As we can see from the chart above, Greggs has far outperformed the index. And here's why I think he's in a position to continue doing it.
The company has the ambitious goal of doubling sales in the next five years and plans to achieve it through three critical steps:
- Grow your real estate sector by exceeding 3,000 stores
- Expand trading into the evening and attract a broader customer base
- Offering an app, click and collect, and delivery via Just eat
In addition, it is considering the possibility of opening stores for the first time outside the United Kingdom. This would be a big positive for shareholders and could usher in an exciting new era of growth.
However, international expansion is never easy. There is a risk that the booming British baked goods business will not be as successful abroad. It is up to management to conduct effective market research to ensure the company is properly positioned in target countries.
Food and actions in demand
Like most popular companies, Greggs stock is as popular as its food. I consider the valuation a moderate risk simply because the price appears to have little room for error in it.
However, I often prefer a fast-growing business that is selling at a reasonable price over a cheap investment that is going nowhere.
The stock has a price-to-earnings ratio of around 21, which is high enough to worry me. However, the valuation could be justified because the business' earnings estimates show high growth for the coming years. Let's hope the business works as expected.
A stable balance
I'm always looking for security in a company's finances, and my favorite place to get a snapshot of how healthy an organization might be is the balance sheet.
From this, I can say that Greggs has a little more liabilities than equity. I generally don't like more than half of assets balanced by different forms of debt.
Since Greggs has such strong results for its industry, such as an 8% net margin and 9% revenue growth on average over the last three years, I can make an exception. After all, the company has generally had more equity than liabilities over the last decade, and I think its higher debt levels right now are largely due to the expansion strategies I mentioned above.
To buy or not to buy?
I think this is one of the best investments in Britain. But, as an investor who also focuses on ethics, I'm a little cautious about how healthy the food is for consumers. That's the only reason I don't buy it.
However, it's hard to deny how good the financial results are. For now, this one is on my watch list.