Greggs‘ (LSE:GRG) shares are in an interesting position at the moment. The FTSE 250 stock’s made a nasty begin to 2025, falling 27% for the reason that begin of the yr, however there’s extra to the story than this.  

The agency’s development prospects aren’t what they was once and because of this the share price is down. However whereas that’s true, the inventory’s buying and selling at its lowest price-to-earnings (P/E) a number of in a decade and I believe it’s properly price contemplating proper now.

Development

Theoretically, Greggs has two methods of rising its revenues. The primary is by opening extra shops and the second is by producing greater gross sales from the retailers it at present operates. 

A lot of the agency’s latest development has come from growing its retailer rely, which isn’t an issue by itself. However the bother is, it isn’t going to have the ability to maintain doing this indefinitely.

Greggs estimates that it could actually preserve round 3,000 venues, however that’s solely 15% greater than the present quantity. So scope for additional gross sales will increase on this entrance is proscribed.

The opposite technique entails producing greater gross sales from its current retailers. And the obvious method of doing that is by growing costs, which also needs to increase margins.

This nevertheless, is dangerous for a enterprise with a model primarily based on buyer worth. The corporate introduced a few weeks in the past that it was elevating costs and its prospects didn’t react properly. 

Whether or not they’ll really look elsewhere – Greggs nonetheless gives the most effective worth on the excessive avenue – stays to be seen. However it’s a danger that traders want to contemplate rigorously. 

Worth

Greggs shares are at present buying and selling at a P/E a number of of 15. And aside from the Covid-19 pandemic – when its internet earnings turned unfavorable – that is the most affordable it’s been in a decade. 

During the last 10 years, the inventory’s constantly traded at a P/E ratio of 16.5, or greater. Which means if the inventory will get again to these ranges from in the present day’s costs, the share price may climb by not less than 15%.

I believe nevertheless, that the agency’s restricted development prospects make betting on this dangerous. Greggs has by no means had extra shops and this implies it has by no means had much less scope to develop revenues by opening new retailers.

As an alternative, I’m trying on the underlying enterprise as a possibility. At in the present day’s costs, it doesn’t look to me as if a lot must go proper for the corporate to generate good returns for traders.

Even when the shop rely doesn’t develop past 3,000, that’s 15% greater than the present stage. And if earnings develop on the similar price, the potential for dividends and share buybacks seems to be enticing to me.

In brief, Greggs has gone from being a development inventory to a worth inventory. Its share price is now largely justified by its current money flows, fairly than those it would generate sooner or later.

Shopping for

Greggs may not have the ability to do rather more than offset inflation by growing costs. However at in the present day’s costs, I don’t assume it must.

I’m trying to purchase the inventory subsequent time I’ve money out there to speculate. My hope proper now could be the inventory stays down lengthy sufficient to present me the chance.