Greggs PLC (LON:GRG) shares have almost doubled since last summer, buoyed by three guidance upgrades in as many months and a record performance in 2018.
Sales surpassed £1bn for the first time ever last year, while the FTSE 250 group also notched up its largest-ever annual profit of £82.6mln.
READ: Greggs to pay special divi after record 2018
The growth is made more impressive by the fact that its retail and restaurant peers have, by and large, struggled to get shoppers to part with their cash of late.
“Greggs has materially outperformed our expectations in recent times and all credit must go to the management team for its work on shop and range development,” said Shore Capital analyst Darren Shirley.
The outperformance in the boardroom has been reflected in the share price, which is up 92% since the start of August. In 2019 alone, it has added more than 40%.
But that has left it trading on forward price-to-earnings multiple – calculated by dividing the current share price by next year’s estimated earnings per share – of around 23.
To put it into context, other FTSE 250 food and drug retailers, such as J Sainsbury PLC (LON:SBRY), Wm Morrison PLC (LON:MRW) and Tesco PLC (LON:TSCO), trade at a multiple of 16.7x forward earnings.
READ: UBS says recent share price surge make Greggs’ valuation ‘challenging’
As a result, there are now some “clear risks” for punters looking to gobble up some Greggs shares, says Markets.com analyst Neil Wilson.
“Uncertainty to the economic outlook is a factor and, trading at something like 23 times earnings, Greggs is looking a touch overpriced.
“What’s unclear now is how Greggs can continue to generate the kind of growth investors have gotten used to – the halo effect from the vegan sausage roll will sUBSide pretty quickly and it needs to roll out more sites.”
Even Shore Cap analyst Shirley, who has repeatedly praised chief executive Roger Whiteside, thinks there isn’t much value in the stock for the time being.
Strong balance sheet
“Trading on record high valuation multiples we believe the strength of profit delivery is reflected in the share outperformance and we reiterate our ‘hold’ stance, choosing not to chase the stock,” he said in a research note today.
It is not that the spreadsheet jockeys can’t see why Greggs is valued so highly, it’s just whether or not there is any further upside to be had.
“You can see why it’s got to where it has,” explains AJ Bell investment director Russ Mould.
“It’s got a solid balance sheet, consistent growth, competitive position, and it’s got itself back on track after a bit of a wobble a few years ago.”
“But justifying vast amounts of upside here, certainly in the short term, is not easy. The valuation looks full for what is in the end a retailer, albeit one with a good brand and that provides products at the right price points.”
Wait for a fall
Mould thinks one of the big issues for Greggs now is that, on such a punchy valuation, there is no room for errors, even if it is brought on by external circumstances.
“Who’s to say we won’t get another Beast from the East or another weather-related problem when footfall has a bit of a wobble? If that happens, then you don’t have much short-term protection valuation-wise.”
He points to 2013, when Greggs endured a miserable summer because of the hot weather and weak footfall, while last year’s Beast from the East was a timely reminder of the impact of weather on retailers.
“You probably will get the odd stumble like that at some stage and that would possibly provide a better entry point.”