Whitbread’s (LSE: WTB) portfolio of businesses has two star players – the Premier Inn budget hotels and the Costa Coffee chain, both of which consumers clearly like. It is no surprise that it is expanding them as fast as it can. But is this strategy good news for investors?
Spending money to expand a business can be like adding money to a savings account. Add enough money and the size of your interest income will grow. Likewise, investors often fall for a profit growth story when really all that is happening is that the company is spending lots of money, but generating lower rates of interest per pound invested in return. But this isn’t happening at Whitbread. Although it is adding more hotels and coffee shops, the existing ones are still growing and its return on capital (in effect, its interest rate) is rising.
The only problem I can see is the price of its shares. Back in April last year I thought 14 times forecast earnings was too much to pay for them. I was wrong. They now change hands at over 17 times. City analysts still expect earnings growth of 12% this year and 10% next. But while that’s attractive, it’s not enough at current prices.
Verdict: take profits