Beloved UK bakery chain Greggs (LSE: GRG) has been on a remarkable journey over the past few years. From its humble beginnings as a local bakery in Newcastle, the company has transformed into a nationwide sensation, winning over customers with its affordable, freshly baked goods and savoury snacks. But as Greggs shares continues to rise, many investors are wondering: is there even more growth ahead?
Valuation
Shares are currently trading at a significant discount to their estimated fair value, according to a discounted cash flow (DCF) calculation. With the current price of £28.40 a staggering 72% below this value, the market may still be underestimating the long-term potential here. Obviously this is just one metric, but it definitely gets me interested.
Even as the share price has rallied 16% in the last six months, this potential undervaluation could be an attractive entry point for new investors. With a focus on convenience, affordability, and quality that has resonated with consumers across the country, particularly in a challenging economic environment, I expect this company to be a firm fixture on the high street for the foreseeable.
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Impressive performance
Similar to the share price, the firm’s financial performance has been impressive of late. In the trailing 12-month (TTM) period, the company reported earnings of £142.5m, representing an 18.5% increase. This growth is a testament to the efficiency and enduring appeal of its products in the UK.
Even more impressively, the company boasts a robust gross margin of 60.74% and a respectable net profit margin of 7.87%. These healthy margins suggest that the company can effectively manage costs and maintain pricing power, even in the face of recent inflationary pressures.
On the financial health front, Greggs shines. The company has no debt on its balance sheet, a rare feat in today’s business environment. This debt-free status not only allows tremendous flexibility for the company, but also reduces its exposure to rising interest rates and economic downturns.
The market also seems fairly optimistic about future growth prospects, with earnings forecast to grow by 5.66% per year for the next five years. This projected growth rate, while not astronomical, reflects the potential for consistent, long-term expansion.
Uncertainty
While Greggs’ prospects appear promising, it’s not all rosy. There has been a significant amount of insider selling over the past three months, which could be a cause for concern. Insider selling can sometimes signal a lack of confidence in the company’s future prospects or an attempt to cash in on recent gains.
Additionally, the business operates in a highly competitive and saturated market, with rivals constantly vying for market share. Maintaining its competitive edge and defending its loyal customer base will be crucial for continued success.
Overall
Taking a step back, the journey this business has been on has been nothing short of remarkable, and the performance of Greggs shares clearly reflects that.
However, when I see management selling shares, I get very nervous. With all the knowledge of how the company operates, and what is around the corner, I place a lot of importance on what management is doing. I suspect that as the company continues to expand its footprint, the potential for further growth could be substantial, but I’ll be waiting for the right opportunity. I’ll be adding it to my watchlist for now.
