Is FTSE 100 Stalwart Whitbread a Good Value?

LONDON -- Capital appreciation is surely the goal of many investors. One method of achieving that is to buy companies with steady earnings growth. If bought when the shares are cheap, two drivers could move the share price up:

  • Growth in earnings, and
  • An upward P/E rerating.

Highly successful fund manager Peter Lynch classified steady growers as stalwarts, which he typically traded for 20% to 50% share-price gains. But whether buying for gains like that or holding for the longer term, we need to know if reliable earnings growth can continue, and whether the shares are cheap.

Seeking durable growth
Not all companies achieve stable growth, as you can see by the aggregate performance of those in London's premier FTSE 100 index (UKX), where the compound annual earnings-growth rate has been just 0.7% over the past five years:

Year to June

2007

2008

2009

2010

2011

2012

FTSE 100 index 6,608 5,626 4,249 4,917 5,946 5,571
Aggregate earnings per share 537 503 427 397 527 557

Consistent, cash flow-backed growth in profits is a promising characteristic in today's markets, so for this series, I'm examining firms with annual earnings growth between 4% and 20%.

One contender is Whitbread (LSE: WTB.L  ) , which has grown from a regional brewer into one of the U.K.'s biggest hospitality firms. The firm manages hotels, restaurants, and leisure clubs, and brands include Premier Travel Inn, Brewers Fayre, Beefeater, and Costa. This table summarizes its recent financial record:

Trading Year

2007

2008

2009

2010

2011

Revenue (millions of pounds) 1,217 1,335 1,435 1,600 1,778
Adjusted earnings per share

79.23 pence

93.1 pence

90.53 pence

111.79 pence

127.38 pence

So, earnings have grown at an equivalent 12.6% compound annual growth rate putting Whitbread in the Stalwart category.

If the name Whitbread evokes the idea of breweries and pubs, as it did with me, think again. The company sold most of its beer-and-spirits-related businesses in 2001, refocusing on the growth areas of hotels and restaurants. The firm reckons it employs more than 40,000 people worldwide, serving more than 19 million customers every month.

Despite its several well-established brands, Whitbread uses a simple method to analyze its revenues: Roughly, 70% comes from hotels and restaurants and 30% comes from perky performer Costa. When you consider last year's revenue was about 1,778 million pounds, that looks like a lovely lot of coffee. We are obviously a caffeine-hooked nation. And most of those sales were from Britain, too, as the company derived only around 3% of sales from overseas.

One legacy of such a long and illustrious trading history is the size of the pension deficit, which stands at about 640 million pounds. Regular contributions to that drag on cash flows. Despite flat markets, the directors reckon that earnings growth is still on the cards going forward, driven by the company's ever-strengthening brands.

Whitbread's earnings growth and value score
I analyze five indicators to determine whether earnings growth can continue and if the shares offer good value:

1. Growth: earnings, revenue and cash flow all growing. 4/5
2. Level of debt: net debt is around 2.7 times earnings with net gearing at about 39%. 3/5
3. Outlook and current trading: good recent trading and a cautiously positive outlook. 4/5
4. Enterprise value to free cash flow: a trailing 23 or so, and above growth rates. 2/5
5. Price to earnings: around 18, and above historic growth rates. 2/5

Overall, I score Whitbread 15 out of 25, which encourages me to believe this stalwart can continue earnings growth that outpaces that of the wider FTSE 100. When compared with the FTSE's price-to-earnings ratio of around 11 and the firm's growth predictions, it looks like the market is pricing in growth expectations.

Foolish summary
The business seems to be performing well, generating cash-backed profits, which are helping it to manage its debt load. It scores lower on the valuation measures, which make the shares look a little pricey -- not unlike its delicious coffee, I think.

Right now, forecasted earnings growth is 10% for the 2013 trading year, and the forward P/E ratio is about 14 with the shares at 2,298 pence. Considering that and the other factors analyzed in this article, I think that the firm can stay on watch for the time being.

Whitbread is one of several steady-earnings-growing stalwarts on the London stock exchange, each with the potential to deliver significant capital appreciation when purchased at sensible prices.

If you, like me, are serious about capital gains, I recommend you now read "Top Sectors for 2012," in which three Motley Fool Share Advisor analysts each study a favorable industry -- and pinpoint a particular share to consider for this year and beyond.

The report covers various opportunities. One could provide "solid returns and nice dividends," and another offers "global diversification and long-term growth potential," while a third looks at a "high-quality business" from a battered sector.

You can read "Top Sectors for 2012" today by requesting the report free. But hurry, as the report is available for a limited time only.

If you are an ambitious investor hoping to profit from this uncertain economy, as I am, I urge you to read "10 Steps to Making a Million in the Market" today -- it could transform your wealth. Click here now to request your free, no-obligation copy. The Motley Fool is helping Britain invest. Better.

Further investment opportunities:

Kevin Godbold owns no shares mentioned in this article. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2080795, ~/Articles/ArticleHandler.aspx, 12/18/2014 3:50:50 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement