Bakery food-on-the-go retailer Greggs (LSE: GRG) is a good example of how valuations can re-rate upwards when a growth story becomes well known.
Ten years ago, the firm was debt-free, cash-generative, engaged in a store opening programme that it was pretty much self-financing and generally looking like a vibrant, well-placed business.
However, back in 2010, the stock market was depressed because of the credit-crunch event that happened a couple of years earlier. The major indices had bounced back from their lows of 2009, but all the talk was of a double-dip. In short, fear was rife in the markets.
Should you invest £1,000 in Darktrace Plc right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Darktrace Plc made the list?
A once-modest valuation
And that fear led to the situation where great-looking companies such as Greggs languished on modest valuations. In one article of the period, I recorded a share price of 468p for the firm and a historical price-to-earnings (P/E) ratio of 14, despite the fine attributes of the business. Today, the share price is around 2,416p and the historical P/E around 28.
If you’d bought some of the shares in 2010 and held until today, you’d be sitting on a more than 400% capital gain. And on top of that, the company has delivered a generally growing stream of dividends over the decade. All that progress for shareholders has been driven by the twin engines of underlying business growth and a valuation up-rating.
But although bullish on Greggs in 2010, I was first ‘wrong’. By the spring of 2013, the share price had slid by around 17% driven by slipping profits and weaker like-for-like sales. Perhaps there’s a lesson in that. To capture the big gains that were to follow you would have needed to keep faith with your own assessment of the company and held through the temporary operational difficulties and the stock market’s pessimism.
Robust trading and growth
Meanwhile, today’s fourth-quarter trading update is robust. In the full-year of trading in 2019, total sales grew by 13.5%. Some of that figure reflects ongoing expansion via new store openings, but Greggs is appealing to its customers because like-for-like sales from company-managed shops rose by an impressive 9.2%.
The firm opened 138 new shops in the period and closed 41. Such active management of the portfolio strikes me as a good thing. Cutting losses and under-performing outlets quickly is a good idea, before they drag on the finances too much. I reckon such a strategy is key to the successful running of a share portfolio too.
Overall, the company now has 2,050 shops, but 302 of them are franchised and operated by partners in travel and other convenience locations. The way the company has managed to expand beyond traditional high-street locations seems to bode well for future growth. In 2020, the firm is targeting another 100 net openings, for example.
The directors expect full-year underlying profit before tax to come in “slightly higher” than their previous expectations and announced a £7m special payment to be shared among all employees. Looking ahead, they see cost pressures but believe the momentum in the business will carry the company through. Despite the valuation re-rating over the past few years, I reckon Greggs is worth following with a view to buying some of the shares at opportune moments.
