Food retailer will have to keep issuing very strong news to sustain the share price momentum
Thursday 14 Feb 2019 Author: James Crux

Shares in food retailer Greggs (GRG) have hit an all-time high of £16.06, helped by a bullish trading update in January and investors keen to own a business on a roll.

Management flagged ‘good sales momentum and operational execution’ at the start of 2019. Greggs offers appeal on both the growth and income front and we expect trading has remained strong. The launch of the vegan-friendly sausage roll may have even provided a modest publicity boost for the broader business.

Sadly we believe all the good news is now in the price and the shares no longer offer compelling value. Several analysts from investment banks Berenberg and UBS also share our view.

The shares currently trade on 22 times forecast earnings for 2019 which looks too rich for a traditional bricks and mortar retailer.

Greggs will have to produce a few positive surprises in its full year results on 7 March if it is to sustain the upward share price momentum.

Berenberg argues the current strong trading is fairly reflected in the valuation, ‘especially given that free cash flow is likely to remain relatively limited this year’. Besides growing its store estate, Greggs is undergoing a significant supply chain investment programme.

Risk-averse investors should also bear in mind that same-store sales comparatives will become tougher in the second half of 2019. Last year saw the first quarter impacted by poor weather before a reacceleration in like-for-like growth in the second half.

And while Greggs is successfully shifting its exposure away from shopping locations towards work and travel, it still has material exposure to the embattled high street and faces intense competition in a crowded UK food-on-the-go market.

We rate Greggs as a fine business and one which still has considerable growth potential. For example, it is interesting to note that coffee sales are doing very well with Greggs ‘leading competitors on value-for-money perception’, says UBS.

Unfortunately we don’t think the shares are value-for-money at the current price, so anyone seeking to invest should wait until the valuation drops back before having a bite.

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