Is Now the Time to Buy Whitbread?

LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market.

So right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.

Today I am looking at Whitbread  (LSE: WTB  ) to determine whether you should consider buying the shares at 2,400p.

I am assessing each company on several ratios:

  • Price/Earnings (P/E): Does the share look good value when compared against its competitors?
  • Price Earnings Growth (PEG): Does the share look good value factoring in predicted growth?
  • Yield: Does the share provide a solid income for investors?
  • Dividend Cover: Is the dividend sustainable?

So, let's look at the numbers:

Stock Price 3-year EPS growth Projected P/E PEG Yield 3-year dividend growth Dividend cover
Whitbread 2,400 pence 40% 16 1.9 2.2% 35% 2.6

The consensus analyst estimate for next year's earnings per share is 145p (8% growth) and dividend per share is 55p (8% growth).

Trading on a projected P/E of approximately 16, Whitbread appears marginally more expensive than its peers in the Travel & Leisure sector, who are currently trading on an average P/E of 15.7. Whitbread's P/E and single-digit growth rate give a PEG ratio of 1.9, which implies the share price is expensive for the earnings growth the company is expected to produce.

Offering a 2.2% yield, the dividend is below average for the sector, with the Travel & Leisure sector average currently at 2.8%. However, Whitbread has a three-year compounded dividend-growth rate of 35%, implying the payout could soon overtake that of Whitbread's peers.

Indeed, the dividend is two-and-a-half times covered, giving Whitbread room for further payout growth.

Whitbread has a high valuation. But what about slowing growth?
Since the beginning of this year, Whitbread has outperformed the market, with the stock up around 53%. However, I believe Whitbread's shares now look expensive.

The owner of the iconic Costa Coffee and Premier Inn brands saw mixed growth during the first half of the year. Overall, the firm's interim results showed revenues up 14% and profits up 13%. However, hotels and restaurants saw a profit rise 9%, while Costa saw profits explode 30% in the UK and 7% internationally.

I believe the group's balance sheet needs to be studied closely. You see, due to the accounting of leased properties, Whitbread has a large amount of off-balance sheet leasehold obligations. In fact, I calculate Whitbread carries total debt and lease obligations of around 1.5 billion pounds, and there is a pension deficit of 640 million pounds, too.

Realistically, I do not believe these liabilities will cause a major problem for Whitbread, as liabilities both on and off the balance sheet only amount to 50% of shareholders' equity. I can also see interest payments are covered nearly four times.

Anyway, taking into account the company's strong share performance this year and the slowing growth predicted, I believe now does not look to be a good time to buy Whitbread at 2,400 pence.

More FTSE opportunities
Although I feel now may not be the time to buy Whitbread, I am more positive on the FTSE shares highlighted in "8 Dividend Plays Held By Britain's Super Investor." This exclusive report reveals the favorite income stocks owned by Neil Woodford -- the City legend whose portfolios have thrashed the FTSE All-Share by 200% during the 15 years to October 2012.

The report, which explains the full investing logic behind Woodford's dividend strategy and his preferred blue chips, is free to all private investors. Just click here for your copy. But do hurry, as the report is available for a limited time only.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

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