Greggs Shares Up 10% Today – Time to Buy GRG Shares?

Greggs shares are up almost 10% today in mid-day stock trading action following the release of the company’s Q3 trading update as the British on-the-go baker assured consumers that its beloved sausage rolls will not suffer from the current supply chain disruptions that most UK businesses are experiencing.

Greggs like-for-like sales experienced a 3.5% increase during this third quarter compared to the same period in 2019 – before the pandemic stroked – while the company managed to add 68 new shops to its network. For the entire year, the goal is to report net openings of 100 outlets.

Meanwhile, the management emphasized that the company has not been immune to the supply chain and labor constraints most other retail businesses are facing and they expect that inflationary pressures will continue well into 2022.

Despite these headwinds, the company set forth multiple ambitious targets for its 2026 fiscal year as part of its Capital Markets Day including a revenue target of £2.6 billion – more than 3 times what the company sold last year.

The company aims to achieve this goal by expanding its network to 3,000 stores – up from a current number of 2,146 venues – while also incorporating delivery services in a larger number of locations.

Can this single-day uptick mark the beginning of an uptrend for Greggs shares or is the company poised to succumb to concerns about its ability to keep its stores adequately stocked? In the following article, I’ll discuss Greggs price action and fundamentals to possibly answer those questions.

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Greggs Shares – Technical Analysis

The price of Greggs shares has recovered remarkably since November 2020 on the back of Pfizer’s encouraging vaccine news. As a result, the stock has gone up 76.3% so far in 2021 including this morning’s jump compared to a 9.3% advance seen by the FTSE 100 index during that same period.

Today’s uptick is being accompanied by above-average trading volumes while the stock is also bouncing off a long-dated trend line support. Moreover, the price has surged above its short-term moving averages while the MACD has reversed its course and it is now getting closer to the signal line while being accompanied by steadily decreasing negative histogram readings.

Moving forward, if the price keeps climbing as a result of Greggs’ assurance that its flagship product won’t be affected by the current supply-chain disruptions, a plausible target could be set at 3,350p per share based on the stock’s long-dated price channel trajectory. This results in a potential 6.1% upside for GRG shares.

Greggs Shares – Fundamental Analysis

“The sausage roll is safe, that’s one thing we haven’t gone short of” stated the company’s Chief Executive, Roger Whiteside, to assure consumers that their favorite dish will remain available – at least for now.

That said, the top executive summarized the kind of difficulties that the company is experiencing by saying: “I wake up every morning and I find out what’s short that day because something has been disrupted in the supply chain”.

These comments from the firm’s boss have apparently encouraged investors this morning while the company’s ambitious long-term goals may also be playing a role in shaping the stock price.

Whether the management achieves these goals or not would be crucial for the performance of GRG shares in the future.

A look at the firm’s past performance shows that Greggs has managed to increase its annual sales from £894.2 million in 2016 to £1.17 billion in 2019 – before the pandemic stroked – at a compounded annual growth rate (CAGR) of 9.4%.

During that same period, the firm’s net margin improved approximately 100 basis points to around 7.5% with its net income after tax standing at £87 million by the end of 2019.

Growing its top-line results to £2.6 billion in the next five years would demand a minimum annual top-line growth rate of 17.3% – this is two times the rate at which sales of the company had been expanding in the years that preceded the pandemic.

The company’s ability to reach this goal is a bit questionable based on its past record and the initiatives that the management plans to introduce (expanding store count, increasing deliveries, and prolonging business hours) don’t seem to be that impactful as to accelerate growth to that extent.

At its current price of 3,181p per share, Greggs is being valued at 37 times its diluted earnings per share of 2019. Given the rate at which Greggs’ bottom-line profitability had been growing from 2016 to 2019 (14.5% CAGR), this multiple seems quite stretched while the management’s ambitious target seems a bit far-reaching and may prove elusive – even more so after considering the challenging environment that the business is facing.

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