Falling in love with a stock is one of the most common blunders made by investors. Take Whitbread. It is graded as a buy by 12 out of 16 analysts, with only one sell rating. But I just don’t buy all this optimism.
Whitbread is basically a consumer discretionary stock. It depends on cash-strapped families and businesses staying at its Premier Inn hotels, tucking into steak and chips at its casual dining outlets, such as Beefeater, Brewers Fayre and Taybarns, and sipping ‘flat-whites’ at its Costa Coffee chain. Sure, these divisions operate at the value end of the leisure sector, but let’s not forget these three divisions all have big fixed costs that require sweating.
And the British budget-hotel industry hasn’t exactly escaped the recession, as room rates have got a lot cheaper: revenue per available room is down 8.5% and occupancy has also taken a beating in 2009. Indeed, what with falling demand and lots of spare capacity, there’s an ongoing price war between the major operators that looks like it will go on well into 2011. Whitbread’s Premier Inn (70% of profits), the leader in the budget space, with a 37% share, is offering rooms at £29 each. In retaliation, Travelodge, the number-two player with a 25% share is dishing out a £19 tariff. That could trigger a deluge of other discounts from mid-market hotels that don’t want to be left behind. Worse still, this sea of cut-throat promotions seems to have been largely ignored by the City, which has bid the shares up over 100% from their March 2009 lows. The bulls seem to be convinced that corporate visitors will soon return in their droves.
Whitbread (LSE: WTB), tipped as a BUY by Panmure Gordon
True, the unemployment rate may have paused for breath at 8%. However, this is only a temporary respite, as I suspect dole queues will simply lengthen again as we see more public-service cutbacks. Moreover, the board is still expanding aggressively by adding masses of new coffee shops and rooms over the next four years. This is a major misjudgement, given the poor economic backdrop.
The City is forecasting 2010 sales and underlying earnings per share of £1.53bn and 102p respectively, rising to £1.66bn and 114p in 2011. This puts the shares on frothy p/e multiples of 13.3 and 11.9. I would rate the stock on a ten-times operating profit (Ebita) multiple. After adjusting for the £513m in net debt and the £341m pension deficit (net of tax), that gives an intrinsic worth of about £10.25 per share. Given the prospects of an ongoing price war, higher taxes, rising unemployment and, at some point, tightening interest rates, my advice is to check-out of Whitbread.
Recommendation: SELL at £13.60
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments