Should you buy shares in Greggs? Today’s options explained

Greggs is a stock market darling, having delivered a total return of more than 500 per cent over the past decade. But shares in the FTSE 250 bakery chain now trade north of £27 apiece and last week a long-serving boss sold £1.85 million from his holding in the business, so is it time for other investors to start stepping back?
Greggs has about 2,500 stores, 500 of which are franchised, where it sells its hugely popular £1.25 sausage rolls, as well as a range of other pastries, sandwiches and hot drinks. The company has been growing at speed, with an aim of opening more than 3,000 outlets and moving existing stores to better locations such as airports, railway stations and even inside supermarkets.
The huge operation, which grew from a single shop in Newcastle upon Tyne in 1951, listed on the London Stock Exchange in 1984. Its cheap and cheerful brand is a powerful one. The low-ticket price of sales chimes strongly with consumers, especially during the cost of living crisis, which has encouraged customer loyalty.
Like-for-like sales grew by 5 per cent in its most recent quarter, supported by its shops staying open longer for evening trading, as well as wider availability through digital channels. Customers can now order their sausage roll directly to their door via apps such as Uber Eats and Just Eat.
Greggs’s ownership of its manufacturing and distribution channels means that key metrics such as return on capital employed and profit margins are far ahead of what is normal among other food retailers. The former, which measures how effectively it generates profit from its assets, has been north of 20 per cent for the past three years. The model also allows Greggs to manage cost inflation easier and react faster to trends in taste, such as pumpkin spice lattes and doughnuts for the autumn season.
This is where its big infrastructure project lies. It has increased capital expenditure, which hit a record high of just under £200 million last year, up from a previous high of £110 million in 2022 and more than double any other year. Greggs has been investing in new production facilities, including two sites in the Midlands which are expected to be operational by early 2027, enabling it to support another 300 shops in southern England.
Greggs looks like it is on track to achieve its target of doubling its sales in the five years to 2026. As such its shares do not come cheap, at 20.6 times forward earnings and a significant premium to the mid-cap FTSE 250 index at 14.4, and 16.8 at the rival sandwich slinger SSP Group. Though this has come down from its high of 41 in 2021, when post-lockdown excitement sent the stock north of £33.
Growth expectations have abated since then, but investors are clearly still willing to cough up for quality. Some analysts have flagged that a bigger capital base could translate into higher depreciation, which could in turn affect earnings and place more pressure to deliver even higher return on capital employed.
City analysts appear to be growing more cautious on Greggs. At the start of this year only 25 per cent of those covering the stock rated it as a “hold”, with the remainder rating it a “buy”. This has risen to 42 per cent. Richard Hutton, the finance director, who has been at the company since 1998, sold £1.85 million worth of the stock last week.
Greggs has been a phenomenal investment for long-term shareholders and it is hard to argue that it does not merit a spot in a portfolio, given its high quality, simple focus and strong brand. But for new investors looking for an attractive entry point, the price tag on the shares looks too steep for now.
Advice Hold
Why Premium on the shares reflects high quality and growth plans
Greencore is officially out of the doldrums. Britain’s biggest sandwich maker has delivered a share price return of more than 100 per cent in the year to date, having staged a remarkable turnaround since it was beaten up during the pandemic.
The company, based in Dublin and listed on the London Stock Exchange, supplies sandwiches, ready meals, soups and sauces to large supermarkets and coffee shops. It was in crisis during the lockdowns, but trading has been revived by workers returning to offices.
Its shares shot up 10 per cent last week, after Greencore told investors in an unscheduled update that business was tracking ahead of forecasts, and that adjusted operating profits are now expected to end this year in the range of £95 million to £97 million, ahead of expectations. This was partly flattered by £2.5 million in IT transformation costs that are now being treated as a one-off, but the midpoint was still 5 per cent higher than what the company had previously guided.
It is yet another sign that the turnaround plan, enacted under its chief executive, Dalton Philips, is working. Leverage is falling too — its net debt, excluding lease liabilities, is expected to end the year roughly £6 million lower at £148 million, and its net debt to earnings before interest, tax, depreciation and amortisation multiple has dropped back towards the low end of its 1 to 1.5 target range.
Greencore shares are now within reach of their pre-pandemic highs, after the trading update last week triggered a flurry of analyst upgrades. The City now expects Greencore to deliver earnings per share growth of 23.6 per cent for its financial year ended in September, and 13 per cent the year following, according to estimates compiled by FactSet.
The return of the dividend in September was also welcome news for long-time shareholders, who have gone without cash payouts since 2019. The shares now trade at an enterprise value to adjusted cash profits ratio of 7.8, compared with a 10-year average of 9.1.
Greencore shares have already enjoyed a remarkable rally this year, but its strong earnings momentum could keep pushing the stock up higher.
Advice Buy
Why Strong earnings momentum