Will Greggs shares, which are up almost 30% in a year, ever fall?

Few companies have grown as quickly as Greggs (LSE:GRG) has been on the market recently. The purveyor of sausages and vegan alternatives has seen its share price rise by almost 30% in the past year. So is this high street hero running out of steam or is there still room to grow?

Impressive growth

The company has come a long way from its humble beginnings as a Tyneside bakery. Today it is FTSE250 a powerhouse with a market capitalisation of £3.24bn. The transformation from local favourite to national brand has been nothing short of extraordinary, driven by astute marketing, product innovation and an uncanny ability to capitalise on changing consumer tastes.

Let’s take a closer look at some of the numbers. The company’s recent impressive run has lifted its price-to-earnings (P/E) multiple to 23.3 times, suggesting investors are willing to pay a premium for a slice of this cookie-cutter paradise.

So what’s driving this growth? Management has been adept at gaining market share across a range of sectors, effectively transforming itself from a lunch stop into an all-day dining destination. The potential introduction of frozen drinks could boost sales volumes in the short term, with a strong contribution to profits due to its VAT exemption.

In addition, a vertically integrated supply network, with its own bakeries and delivery system, gives the company a significant advantage in controlling costs and maintaining quality nationwide. This operational efficiency has allowed the company to navigate the turbulent waters of inflation and supply chain disruptions much more smoothly than many of its competitors.

Some concerns

But not everything is so simple in the land of grilled steaks and sausage rolls. Management has identified some challenges that could potentially hinder its rapid growth. The company emphasized “demanding market” and a slower customer growth trend, which may impact future growth.

While annual profits are expected to grow at a steady 7.7% rate over the next three years, gross margins are expected to be “structurally different” to pre-pandemic levels. While it has only fallen from 8.1% to 7.1% over the past year, investors may be concerned that they could face further declines in the longer term.

On the one hand, management has demonstrated an impressive ability to adapt to changing consumer preferences and navigate challenging economic conditions. Strong brand recognition and efficient operations provide a solid foundation for future growth.

On the other hand, the current valuation suggests that a lot of that potential is already priced into the stock. With a P/E of 23.3 times, the company isn’t exactly in the bargain bin, and any missteps in execution could lead to a steep decline.

I’m looking somewhere else

Greggs has proven to be more than just a passing fad, transforming itself from a regional bakery into a national takeaway powerhouse. While the company’s growth story is impressive, I think investors should approach it with a balanced perspective. The potential for further expansion and product innovation is enticing, but the high valuation and potential market challenges suggest caution.

I suspect this high street giant will be around for a while, but I think Greggs shares may be fairly priced at the moment. I think there are better deals elsewhere, so I’ll pass on it for now.