Is Whitbread a Buy?

LONDON -- I reckon that Whitbread (LSE: WTB  ) , through its expanding hotel, restaurant, and coffeehouse portfolio, remains on the fast track to rapid earnings growth.

Analysts expect Whitbread to maintain double-digit growth over the medium term. The City consensus puts earnings per share for the year ending February 2013 at 148.6 pence, a meaty 17% rise from 2012. An 11% increase is expected the following year to 165.1 pence per share, too.

The company offers a dividend to sweeten the deal -- respective yields of 2.1% and 2.3% are predicted for 2013 and 2014 -- but Whitbread's earnings prospects are what make the share an attractive pick.

Smell the coffee
Whitbread improved sales by 14.4% during its third quarter. Most impressively, it saw revenue from its Costa coffeehouses leap 25.5%. This advance was turbocharged by the firm's rapid expansion to more than 1,500 U.K. outlets from just 500 in 2006.

The Costa brand operates across more than two dozen territories spanning the globe, and aggressive moves into emerging markets -- particularly India and China -- should deliver long-term growth.

The firm's other leading brand, hotel chain Premier Inn, boosted total sales by 12.6% during the third quarter. The introduction of a more dynamic pricing system, some website improvements, improved marketing, and significant investment in room refurbishment helped Britain's largest hotel chain pound the competition.

The group's "RevPAR" -- a hotel's average daily room rate multiplied by its occupancy rate -- outperformed the U.K. hotel average by 2.1% in the period, according to Barclays Capital. I reckon prolonged difficulties in the domestic economy are likely to underpin demand for Whitbread's budget-hotel brand.

Whitbread's ambitious five-year plan aims to expand the number of Premier Inn hotel rooms in Britain to 65,000 by 2016, up from about 50,000 at present. The group also aims to double the size of its Costa division by boosting the number of global outlets to 3,500.

Accelerating expansion justifies high price
The big question for prospective Whitbread investors is whether they should consider buying at such a high P/E ratio. The multiple for 2013 stands at 17.7, according to broker estimates, although it is expected to fall to 15.9 and 14.4, respectively, for 2014 and 2015.

Barclays Capital notes that the company boasts a historic P/E ratio of 14.6 but that an improved business mix through the prompt expansion of Costa -- to produce a quarter of total operating profits versus 8% five years ago -- boosts potential earnings growth and thus justifies a higher multiple.

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