Insufficient Growth At Greggs plc (LON:GRG) Hampers Share Price

Explore Greggs's Fair Values from the Community and select yours

With a price-to-earnings (or "P/E") ratio of 11.1x Greggs plc (LON:GRG) may be sending bullish signals at the moment, given that almost half of all companies in the United Kingdom have P/E ratios greater than 16x and even P/E's higher than 30x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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There hasn't been much to differentiate Greggs' and the market's earnings growth lately. One possibility is that the P/E is low because investors think this modest earnings performance may begin to slide. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

View our latest analysis for Greggs

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Greggs.

Is There Any Growth For Greggs?

The only time you'd be truly comfortable seeing a P/E as low as Greggs' is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a worthy increase of 5.0%. The latest three year period has also seen a 22% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 0.9% per annum during the coming three years according to the analysts following the company. That's not great when the rest of the market is expected to grow by 16% per year.

In light of this, it's understandable that Greggs' P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Greggs' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 2 warning signs we've spotted with Greggs (including 1 which makes us a bit uncomfortable).

If you're unsure about the strength of Greggs' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.