Greggs (LSE:GRG) is one of the UK’s best-known food-on-the-go businesses. However, Greggs shares are down 12% in the past year, with the share price not far away from five-year lows. Despite some doomsayers, I believe the company’s starting to look undervalued. But why?
Assessing the outlook
To begin with, I think the market may be underestimating the strength of its brand and customer loyalty. Greggs has built a reputation for value, and in periods when consumers are under pressure from higher living costs, affordable food options can become even more attractive.
When I look at the year ahead for the UK, I think consumers will come under more pressure. The latest economic data from last week showed April GDP contracted by 0.1%. If the Bank of England committee raises interest rates this summer to combat inflation, it could hit growth even more. This could see people pivot back to eating from Greggs more, boosting revenue.
Another factor is the company’s long-term expansion opportunity. Greggs has been steadily increasing its store count, and many locations still have room for growth. The May trading update showed Greggs opened 41 new stores during the period, taking the total to 2,759 outlets.
It also confirmed the firm remains on track to deliver around 120 net new openings in 2026. If management continues opening successful sites and improving productivity, earnings could grow faster than the market expects.
The third reason is that Greggs has potential growth from operational improvements. The company continues to invest in technology, digital ordering, loyalty schemes and new formats. For example, it has recently expanded into travel locations, with plans to open its first airport store outside the UK at Tenerife South (of all places!).
The new frozen-products facility in Derby is another example of the business thinking outside the box. Ultimately, these changes can increase customer frequency and improve efficiency over time. A business that can sell more to existing customers while keeping costs disciplined should be more profitable. But the current share price doesn’t reflect this optimism.
Both sides of the argument
I appreciate these factors are subjective. Some may turn around and decide to flag up risks instead. It’s true that food inflation remains a challenge, as higher wages, energy bills and ingredient costs can squeeze margins. Competition’s another concern, with supermarkets, coffee chains and fast-food companies all fighting for the same convenience spending.
But when I look back at the share price chart, the stock could rally 85% from current levels and it would only then reach the price it was at back in September 2024 (less than two years ago). I know the company’s growth rate has slowed since then, but it just doesn’t seem to me that the reaction of the stock is proportionate to the fundamentals of the business, or the outlook from here.
On that basis, I do think it’s undervalued and I’m looking at adding it to my portfolio. Investors who agree with me could consider doing the same.
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Jon Smith has no positions in the shares mentioned.
