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If you follow my work or my social media accounts, you’ll know that I’m not the biggest fan of Greggs (LSE:GRG) shares. I don’t think the stock is vastly overvalued today — I used to — but I’m also not sure what going to drag the stock higher.
Taking a quick snapshot, it’s currently trading around 13.2 times forward earnings and it has a price-to-earnings-to-growth (PEG) ratio of 3.2. That’s not great, but it’s slightly better when you factor in the 4% dividend yield.
In other words, it’s a very middling stock. The yield is decent, but the rest of the valuation isn’t particularly strong. The balance sheet is starting to look a little concerning, however, with net debt representing 25% of the market cap.
Is it a quality stock? Well, it has great brand strength and it’s practically everywhere in the UK. But not really. It makes sausage rolls, not highly technical engine parts.
In short, I’m saying I’m not expecting there to be a massive uptick in demand or margins here. And essentially that’s what needs to happen to make this valuation make sense for me.
As it stands, the forecasts show negative earnings growth when averaged across the next two years.
So, what’s better value?
Honestly, there are a lot of stocks that I think are better value. But I’m going to stick with consumer goods and pick Fresh Del Monte (NYSE:FDP). Yes, the guys who make the pineapple chunks — and lots of other things.
It’s a US-listed stock as the ticker suggests, and simply, I prefer it. It’s one of the to- ranked stocks according to several quantitive models, scoring high on valuation, quality, and momentum.
Firstly, it’s cheaper than Greggs, trading at 12.2 times forward earnings. It’s also growing earnings faster, with an expected earnings growth rate around 9%.
This gives us a PEG ratio around 1.4 times, which, when combined with a 3.2% dividend yield, I think is good value. That sense of value is reinforced by strong price-to-sales and price-to-free-cash-flow ratios.
It’s also got a much stronger balance sheet. The company’s net debt is around $81.1m, which really isn’t too much of a concern for a company worth $1.4bn. For the sake of comparison, that’s around 6% of the market cap — a much safer position than Greggs.
I also like that it owns vast swathes of land, giving it a tangible asset base that underpins long-term value. Land tends to hold its worth even in volatile markets, providing a degree of security alongside growth potential.
The risks are broad, including exposure to climate and weather shocks, supply chain disruptions, regulatory and food safety issues, global competition, and fluctuations in commodity prices.
However, I still think this is a better option than Greggs, and one that should be considered by growth or dividend-focused investors.
