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Greggs’ (LSE: GRG) shares are down 24% from their 21 May one-year high of £22.02. But I think this is way out of sync with the strength of the underlying business.
This features steady growth, resilient demand, and a major brand in the UK food-on-the-go market. These factors underpin robust earnings growth forecasts that could drive the shares much higher over time.
So, where should the stock be trading, in my view?
Earnings growth
A risk to Greggs’ earnings is the intense competition in the sector, which could squeeze its margins. Nonetheless, analysts expect earnings to grow by an annual average of 7% to end-2028.
Its 2024 results showed record sales of £2.14bn and record profits of £203.9m. It overtook McDonald’s as the UK’s top breakfast takeaway in 2023 and has retained that position.
Its H1 2025 update saw sales rise 6.9% year on year to £1.03bn. And its Q4 results saw sales up 7.4%.
A bargain relative to peers?
To gauge whether Greggs is undervalued, I started by comparing its key valuations with those of its competitors.
At a price-to-earnings ratio of 11.5, Greggs sits in the middle of a hospitality peer group, which averages 16.2. This includes Mitchells & Butlers at 9, JD Wetherspoon at 10.6, Whitbread at 18.4, and McDonald’s at 27.
So, on this measure, it looks undervalued. The same is true of its 0.8 price-to-sales ratio, compared to its competitors’ average of 2.8.
Over and above this, there is a structural problem with all relative (between companies) valuations to factor in. A sector-wide over- or undervaluation can obscure whether one company is genuinely cheap or expensive.
The UK consumer discretionary sector — where Greggs sits — is trading at a 15%-25% discount to its three-year average. So, several companies in it are likely more undervalued on a standalone basis than they appear from headline numbers.
What’s Greggs really worth?
To get to the bottom of Greggs’ true value, I ran a discounted cash‑flow (DCF) analysis. This estimates ‘fair value’ by projecting future cash flows and discounting them back to today.
This provides a clean, standalone valuation that is not distorted by whether the wider sector is over-‑ or undervalued.
In Greggs’ case, I used a discount rate of 9.4%, and a perpetual growth rate of 3% (the five-year average UK 10-year gilt yield). The model also factors in the analysts’ consensus earnings growth forecasts for Greggs of 6.8% a year. Other DCF models may use different inputs, which could produce lower valuations.
However, based on these numbers, my modelling suggests Greggs shares are 46% undervalued at their current £16.74 price.
That implies a fair value of £31 — approaching double where the stock trades today.
Thus gap between price and value is important, as asset prices tend to converge to their fair value over time. So it suggests a potentially terrific buying opportunity to consider if those DCF assumptions hold.
My investment view
Over 50 now, I prioritise shares with much higher dividend yields to help fund my retirement, and Greggs’ modest 4.1% payout does not fit that strategy.
Even so, the valuation gap and long-term growth outlook make it a stock many investors may want to consider.
