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Greggs‘ (LSE:GRG) shares have jumped nearly 30% from their November lows. Despite this, the FTSE 250 stock is still down 40% in two years and remains one of the most shorted in the UK. In other words, some sophisticated investors are betting that Greggs has much further to fall.
With consumers still under pressure and high streets in continuing decline, might the stock crash 50% from here? I asked ChatGPT for its input.
What needs to happen?
I know, I know. ChatGPT has hallucinations and can make mistakes. It shouldn’t be relied upon for stock picks and has no skin in the game (quite literally).
Still, I did agree with its assessment: “I don’t think a 50% crash is the most likely outcome based on the numbers we have today“.
For context, the half-year numbers it refers to are:
- Sales up 7.2% to £1.1bn.
- Operating profit up 22.9% to £86.5m.
- Thirty-four net openings, bringing the estate to 2,773 shops.
These aren’t the figures you’d associate with a company set to lose 50% of its market value. For that, the AI bot said a few negative developments would need to take place:
- Life for like (LFL) sales stagnate or turn negative.
- Profit margins collapse.
- New-store returns deteriorate.
- Management repeatedly cuts guidance.
Digging deeper
Are any of these things likely? Well, management did warn that second-half costs would rise due to a major new national distribution centre opening in Derby and wage inflation. But pre-tax profits are still expected to remain broadly flat for the year.
LFL sales actually rose 2.1% in company-managed shops in the first half, while new openings are not cannibalising existing store sales, according to company data.
Therefore, none of the reasons cited above for a share price collapse appear likely. Moreover, as mentioned, the stock’s already down 40% in two years, so there’s no froth here. The forward P/E ratio of 14.5 is broadly in line with the FTSE 250.
One thing ChatGPT didn’t mention is the dividend. Barring the pandemic, Greggs has a solid dividend track record, and the forward-looking yield of 3.8% looks attractive to me.
Is Greggs worth considering?
Returning to the declining high streets I mentioned earlier, Greggs isn’t hanging about in desolate locations with just tumbleweed for company. It’s actively moving to where people actually still are (motorway service stations, airports, train stations, supermarkets, etc).
Greggs has even opened a shop at Tenerife South Airport, which has started strongly, and is actively looking at other overseas travel hubs. More of the company’s frozen food is also being sold in Tesco and Iceland.
Longer term, I remain quite bullish on the growth story, as Greggs aims for at least 3,500 UK shops. This will be supported by two new state-of-the-art distribution centres, including the Derby one that will enable upstream robots picking frozen goods.
These facilities are expected to increase productivity and support strong returns on capital. And as the capital expenditures associated with these fall, Greggs will move to a more cash-generative phase, putting it in “a position to increase returns to shareholders“.
If an investor has a five-year horizon, I think the shares are worth considering today. It’s actually one of many potential FTSE 250 bargains I see right now.
Should you invest £5,000 in Greggs Plc right now?
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Ben McPoland has no position in any of the companies mentioned.
This story originally appeared on Motley Fool
