There are numerous stocks in the FTSE 100 and FTSE 250 that stay in the limelight for years, or even decades. Some popular examples would be Lloyds Banking Group and easyJet. But in my experience, popularity rarely translates into chunky returns. In fact, looking at the last five years, these stocks have actually dropped by 15.8% and 49.4% respectively.
There are various factors behind these lacklustre returns. And dividends have helped partially offset the losses. Nevertheless, they continue to lag their indices. Yet, the same can’t be said about Greggs (LSE:GRG), which has climbed 83.2% over the same period. That’s the equivalent of 12.9% annualised return – a market-beating rate.
Despite this, the average trading volume only sits around £240k. By comparison, both Lloyds and easyJet are in the millions. How has this glorified bakery business outpaced the market? And should investors be considering these shares for their own portfolios today? Let’s take a closer look.
Turning pastries into profits
Having been founded over 80 years ago, Greggs has turned into a bit of a household name. The continued popularity of its products has fuelled the expansion of its store network. Today, there are over 2,400 locations across the country in towns, cities, airports, train stations, petrol stations, and industrial estates, among others. And following its latest results, management is still pursuing adding another 600 more retail units over the coming years.
As such, the firm has had little trouble growing its top line. While the cost-of-living crisis has caused consumers to pull back on discretionary spending, the low-cost nature of its baked goods has made the firm seemingly immune to the economic turbulence.
In the third quarter of 2023, sales continued to grow by 20.8%, thanks to the recent introduction of evening trading, as well as making its products available for delivery on the Uber Eats platform. Pairing this with near-10% operating margins, the sausage roll maker is one of the most cash-generating firms in the FTSE 250.
The threat of inflation
So far, this business has proven largely resilient against the threat of inflation by passing on higher costs to customers. However, there are limits as to how much management can do this before Greggs is no longer considered cheap in the eyes of consumers.
In the meantime, wage inflation is starting to apply more pressure. The good news is that management expects packaging and raw ingredient costs to start easing throughout 2024. But whether that will be enough to offset the higher staff costs has yet to be seen.
However, it’s worth pointing out that management recently repeated its full-year guidance and has hiked shareholder dividends in the process. Both are a strong signal of confidence, in my eyes. And at a price-to-earnings (P/E) ratio of 18.5, the shares look relatively fairly priced in my eyes.
As such, I’m tempted to open a position in this FTSE 250 business once I have more capital at hand.
