I’ve said this once or twice, but I never quite got the hype about Greggs (LSE:GRG) shares. The stock has been on two significant rallies since the pandemic, with its valuation looking incredibly stretched at points, especially for a purveyor of sausage rolls.
However, things aren’t looking so rosy anymore. After the firm released a less-than-inspiring guidance, the stock fell. In fact, Greggs shares are down 32% over six months. This also means the stock’s now down 11% over five years.
As such, a £10,000 investment five years ago would be worth around £8,900 today. But when dividends are taking into account, it may be a break-even trade.
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Momentum wains and stock flops
Greggs performed particularly well during the cost-of-living crisis when Britons swapped eating out and more expensive food-on-the-go competitors for Greggs’ baked goods. Revenue gains were impressive and this was reflected in the share price.
Things aren’t looking so tasty anymore. On 9 January, Greggs’ CEO Roisin Currie reported subdued consumer confidence in the second half of 2024, leading to slower sales growth of 2.5% in Q4 and the subsequent share price decline.
Looking to 2025, the company faces increased cost pressures, notably the rising National Living Wage. Despite the potential benefits of increased consumer income, Currie highlighted that lower consumer confidence continues to affect spending and footfall.
She remains confident however, in Greggs’ ability to offer “value leadership” amid inflationary pressures.
Not a value stock
Greggs might offer good value on the high street, but even at today’s lower price, I don’t believe it offers value for investors. The company’s currently trading at 15.5 times forward earnings — that’s a small premium to the index average.
Of course, that would be fine if Greggs offered the type of growth to justify this slight premium. But the forecasts suggest that earnings will only grow by 7% on average over the medium term.
In turn, this leads us to a price-to-earnings-to-growth (PEG) ratio around 2.2. Typically, a PEG ratio under one is reflective of an undervalued stock. Of course, there’s a 3% dividend yield to take into account.
However, even a dividend adjusted PEG ratio suggests that the stock could be overvalued by as much as 55%.
The bottom line
Metrics can be deceiving and sometimes analysts’ growth forecasts are simply incorrect. However, as it stands, the figures simply suggest that the stock’s overvalued.
Despite this, the majority of institutional analysts covering this stock are still upbeat on its prospects — 10 positive, one neutral, and two negative. However, sometimes analysts take time to adjust their forecasts. For now at least, the average share price target suggests the stock’s undervalued by 34%.
Personally, it’s not a stock I think is worth considering. There are far better options on the FTSE 250, in my opinion.
