Will Greggs plc's Stock Rebound Amid Strong Fundamentals?

The recent decline in Greggs plc's (LON:GRG) stock price has left many investors wondering if the weakness is temporary or a sign of deeper issues. With a 30% drop in share price over the last six months and a downgrade to a Sell rating by Panmure Liberum, the outlook seems bleak. However, a closer look at Greggs' fundamentals reveals a more nuanced picture. Let's dive into the data to see if the stock's recent struggles are just a blip on the radar or a harbinger of things to come.



Market Sentiment and Broker Ratings

One of the key factors driving the recent decline in Greggs' stock price is the negative sentiment from market analysts. Panmure Liberum downgraded the stock from a Hold to a Sell rating on January 21, 2025, and cut its price target from 3,300p to 1,733p. This significant reduction in the price target, which is roughly 17% below the current share price, has undoubtedly contributed to the stock's decline. The broker's analysts believe that Greggs' period of 'supernormal' growth may be over and that the rollout of evening trade, a strategy designed to boost growth, may actually hurt the high street chain. They wrote, "We query whether it is resonating with customers in a highly competitive market."

Economic Conditions

The weak UK economy is another factor driving the decline. Economic weakness could lead consumers to cut back on food on the go, which is a significant part of Greggs' business model. The National Insurance changes announced in the 2024 Budget are also likely to hit Greggs' profits, further exacerbating the economic pressures. Additionally, theft and associated hits to profits are a concern. Some Greggs stores have had to put padlocks on their beverage cabinets to stop people stealing bottles of Coke, indicating operational challenges that could impact profitability.

Financial Performance

Despite these challenges, Greggs has strong fundamentals. The company reported a revenue of £2.01 billion in 2024, an increase of 11.32% compared to the previous year's £1.81 billion. Earnings were £153.40 million, an increase of 7.65%. The company's forward-looking price-to-earnings (P/E) ratio is under 15, looking at the 2025 earnings per share (EPS) forecast, although this EPS forecast could fall in the months ahead. The company's ROE (Return on Equity) is 28%, which is higher than the industry average of 8.4%, indicating efficient use of capital.

Growth Potential

Greggs has a strong brand and a high level of profitability. The company is rolling out new stores all the time, with 226 new shops opened in 2024. This expansion strategy could potentially drive future growth, despite the current challenges. The company's dividend yield is 3.86%, which is attractive to income-focused investors. However, there is a risk of a dividend cut if sales are weak this year, as indicated by Panmure Liberum's analysts.

Conclusion

In conclusion, while Greggs' recent financial performance metrics are generally positive, the company may be facing some challenges in the short term. However, its strong track record of generating profits and efficient utilization of shareholder investments suggest that Greggs has the potential for long-term growth. Investors should carefully consider these factors when evaluating Greggs' long-term prospects. The recent decline in Greggs' stock price is driven by negative market sentiment, economic challenges, and operational issues. However, the company's strong fundamentals, including high profitability, efficient use of capital, and a commitment to shareholder returns, suggest that it may still have potential as a long-term investment.