Picture supply: Getty Photographs
I lately purchased some shares in baker Greggs (LSE: GRG) at what appeared like a tasty worth to me. That took place after the corporate’s full-year outcomes dissatisfied the Metropolis because of indicators of gross sales progress slowing down.
To me, it appeared just like the outcomes additionally contained loads of excellent news and I reckoned that the share was a possible cut price. Since then, nevertheless, what has occurred?
The share has fallen even additional!
In truth, at this time (31 March), it hit a brand new 12-month low. Positive, it’s nonetheless 15% increased than it was 5 years in the past. However the worth is 45% under the place it stood as lately as September.
A falling share worth might imply that Greggs is now much more of a possible cut price than it was after I invested and I ought to contemplate shopping for extra shares.
However it is also a crimson flag that that is what is named a price lure.
Some frequent worth lure parts
A worth lure is strictly what it feels like: a share that appears low-cost however the truth is seems to not be, as an already low-seeming share worth falls additional.
Greggs shares in the mean time do show some indicators generally seen in worth traps.
For one, the valuation seems to be pretty low-cost. Particularly, the price-to-earnings ratio of 12 doesn’t look pricy to me for a well-established, worthwhile agency with a confirmed enterprise mannequin.
On high of that, Greggs has finished very nicely prior to now, rising its gross sales and constructing robust buyer loyalty. Many worth traps seems to be low-cost as a result of the enterprise has a robust observe document of efficiency. However in fact, what has occurred earlier than shouldn’t be essentially an indicator of what’s to return – and a once-mighty firm can fall a good distance in a short while.
I see a long-term cut price
There are dangers for Greggs, to make certain.
Its store-opening programme has added gross sales volumes, nevertheless it prices cash to construct and match out retailers. As excessive streets proceed to battle, components of Greggs’ store property might face difficulties in sustaining their present stage of buyer visits in coming years.
On stability, although, I reckon the corporate’s finest days are probably forward of it. Its enterprise is straightforward and advantages from economies of scale that may develop over time, for instance, because it opens extra centralised manufacturing amenities.
Demand for reasonably priced meals will stay excessive for the long run, I reckon. Greggs has developed a singular menu of competitively priced merchandise that assist it meet that want. By increasing its enterprise into night commerce, it is ready to make higher use of current property which have traditionally been extra closely used earlier within the day.
Whereas the Metropolis has fretted over decrease progress charges, Greggs expects to continue to grow — and stays solidly worthwhile.
To me, Greggs shares don’t appear like a price lure a lot as a possible cut price to carry for the long run. If I’ve spare money to put money into April, I’ll contemplate shopping for some extra for my portfolio.
