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I purchased some shares in Greggs (LSE: GRG) earlier this yr and plan to carry them for some time. Even now, I feel Greggs shares are doubtlessly closely undervalued relative to the agency’s long-term prospects.
In actual fact, as a long-term investor, I reckon my Greggs shares may rise in worth over coming years by rather a lot from at present’s stage. Listed below are three explanation why.
1. Scaling up a confirmed mannequin
Greggs ended final yr with 2,618 retailers. A decade earlier than, that determine was 1,671. In different phrases, that decade noticed Greggs’ property develop by 57% — from an already massive base.
What is going to the approaching decade convey?
Final yr noticed Greggs open a report variety of new retailers. It’s targetting a internet complete of 150 openings this yr alone and has mentioned it continues to see a “clear alternative for considerably greater than 3,000 UK retailers over long run”.
That’s within the UK alone. I reckon Greggs has huge potential to develop to adjoining markets such because the Irish Republic and the Netherlands, though it has not introduced plans to take action but (given its development prospects within the UK, that strikes me as sensible for now).
With a confirmed enterprise mannequin and rising centralized manufacturing capabilities, Greggs ought to have the ability to realise substantial economies of scale.
2. Increasing Greggs’ attain additional throughout the day
Once you get hungry in the course of the evening, do you consider shopping for one thing from Greggs?
It’s unlikely – and till not too long ago, most individuals solely related the chain with mornings and lunchtimes. However it has been increasing its providing within the evenings to attempt to take a much bigger share of dinnertime spending.
That strikes me as a doubtlessly huge alternative.
Night gross sales are solely 9% of company-owned store gross sales in the meanwhile. As one in all three key meal events through the day, on a easy stage I feel they might finally account for 33%, however with out consuming into breakfast or lunch gross sales.
That could possibly be a sizeable increase to revenues and earnings, as in the meanwhile many Greggs’ retailers are sitting unused for lots of hours every day.
3. Bettering revenue margins
Final yr, Greggs’ pre-tax revenue margin was 10.2%. That isn’t that far off double the 5.4% of a decade in the past.
As the corporate scales up its operation additional and utilises its current property like retailers extra, I feel the revenue margin may develop additional.
That might produce a double whammy when it comes to earnings per share, as income development mixed with larger revenue margins push up earnings per share considerably in years to return. Previously decade, Greggs’ diluted earnings per share grew 488%.
I’m holding!
With a price-to-earnings ratio of 14, I feel Greggs shares look low cost given the enterprise prospects.
There are dangers, in fact. Any extended shutdown of retailers as seen through the pandemic may harm revenues and earnings badly (because it did for Greggs then). Opening too many retailers may threat taking gross sales from one another slightly than including incremental development.
However I feel the valuation must be larger – and a mixture of sturdy income and earnings development in years to return may push it there. I’ve no plans to promote my Greggs shares.
