Greggs (LSE:GRG) shares fell further on Tuesday 29 July after the company released some rather uninspiring first-half results. The results, which revealed a 14% drop in pre-tax profits for the first six months of the year, compounded concerns about the company’s trajectory.
Personally, I’ve been bearish on Greggs for some time, but I never expected earnings to fall as drastically as they have in 2025. My issue was always with the valuation and that Greggs simply couldn’t hope to satisfying the valuation with its growth projections.
Last year, the main issue was that the forecasts suggested that Greggs would deliver around 10% earnings growth annually throughout the medium term. That’s not strong enough for a company trading at 24 times forward earnings with a 2% dividend yield.
However, the equation has changed dramatically in just one year. Medium-term earnings growth is weak, primarily because 2025 is expected to be a less prosperous one than 2024. It now trades at 13 times forward earnings and offers 4% forward yield.
Is it better value today?
As noted, Greggs trades at 13 times earnings for 2025. This falls to 12.8 times for 2026, and 12.1 times for 2027. There is earnings progression during these years but earnings per share will remain below 2024 levels throughout.
However, this 4% dividend yield is not to be sniffed at. In fact, analysts see that rising to 4.2% by 2027. Now, remember this is all based on the current share price. We can’t forecast exactly where the stock will be trading in two years.
So, is this modest earnings growth, sizeable dividend yield, and lower price-to-earnings (P/E) ratio appealing to me? Well, not really. It’s clearly better value today than it was a year ago and the risk of a pullback is much lower, but the numbers just don’t add up.
Better value elsewhere
While the current valuation, coupled with a very strong balance sheet, may look more appealing than it was a year ago, I believe investors should look elsewhere.
In addition to my valuation-based concerns, the business may struggle to gain traction as the cost-of-living crisis becomes more of a distant memory.
Greggs’s management actually blamed the poor performance in H1 on the weather. Seemingly, it was too cold for people to leave the house in the winter and too warm for people to eat sausage rolls in the summer.
But maybe it’s just changing consumer behaviour. As we move away from the cost-of-living crisis, we may be seeing customers prioritise healthier alternatives, or maybe just more premium options.
It’s also true that Greggs is ever-present in the UK and simply might not have room to expand. Coupled with general preferences for independent cafes and bakeries, there’s not a commanding narrative that makes me want to back this sausage-roll maker.
Personally, I’m not planning to add it to my portfolio any time soon.
