Whitbread Could Be Initiating Another Bull Run

| About: Whitbread Plc (WTBCF)

Summary

Whitbread's technical picture improved recently.

Fundamentally, the current stock price puts the company trading close to the average valuation seen in the 2009/2016 period.

The current stock valuation is also warranted on a forward looking basis as the management team reassured investors that its 2020 goals are on track to be met.

Putting everything together, it is worth keeping an eye on Whitbread but it is still early to jump in as the £43 resistance hasn't yet been broken.

(Editor’s note: There is much greater liquidity on the LSE under the ticker WTB)

The Company

Whitbread (OTC:WTBCF) (OTCPK:WTBCY) is the UK's largest hotel, restaurant and coffee shop operator with 50,000 employees.

In the hotel business it is the owner of the Premier Inn brand, which is the UK's biggest hotel chain with over 700 hotels and 59,000 rooms and with the target to reach 85,000 rooms by 2020. It also has a small presence overseas with 5 hotels in the Middle East and 3 in India and has the goal to operate 50 international hotels by 2018.

In the restaurant segment it is the owner of the Beafeater Grill, Brewers Fayre and Table Table brands. These chains have 140, 160 and 80 restaurants respectively across the UK.

In the coffee shop industry it is the owner of the Costa brand, which is the largest and fastest growing coffee shop chain in the UK and which also has a global footprint in another 31 countries.

The stock had quite a run in the current bull market, specially in the period between 2012 and 2015. As the graph below shows, the trend defined by the long term moving average was your friend in this period and it also supported the decision to take profits at the end of the summer of 2015. The MACD suggested similar decisions as it traded in positive territory in the 2012 to 2015 bull run and also made a bear warning in August 2015 when it shifted to negative territory.

Source: Trading View

The stock traded sideways in 2016 between £33 and £43. The recent price action suggests that the stock could soon initiate another bull run and the moving averages, the MACD and the RSI indicators all point towards that conclusion. However, I would rather wait for the £43 resistance to be broken before jumping in.

Backward Looking

Before looking at the company's fundamentals, let me remind you that Whitbread's fiscal year finishes in February. This means that, for example, 2016's data here presented refers to the 12 month period that ended on the 29th of February 2016.

Whitbread sales are growing rapidly. From 2009 to 2016, sales grew at a 11.8% compounded annual rate.

Source: Author (in GBP Millions)

It is also interesting to note that the top line growth after the financial crisis was reached while keeping a stable operating margin of 19.1% of revenue. This shows the company is committed to deliver both top and bottom line growth (which is not always the case as many companies try to grow their sales by cutting their profit margins). In fact, from 2009 to 2016, operating income grew at a 17.6% compounded annual rate and net profit grew at a 23.1% compounded annual rate.

Source: Author (in GBP Millions)

Please note that I made small adjustments to the depreciation & amortization & impairment, financial and extraordinary components of the operating income so that it is comparable with the other stocks I follow. Without those changes, the operating income would be slightly higher than the one presented in these graphs.

However, the number of shares outstanding increased 8.8 million or 5.1% from 174 million to 182.8 million. As a consequence, the growth in revenue, operating income and net profit is a bit less impressive on a per share basis than in absolute terms. In fact, revenue per share grew at a compounded annual rate of 11.1%, operating income per share grew at a compounded annual rate of 16.8% and net profit per share grew at a compounded annual rate of 22.3%.

In the meantime, the company strengthened the shape of its balance sheet. Please note that I calculate net liabilities by deducting the current assets from total liabilities (both current and non-current liabilities and both financial and operational liabilities). I believe this is a more comparable metric because many companies reduce their financial debt (loans) at the expense of their operational debt (payables). Also, some companies increase their cash positions by anticipating receivables, among other "financial report-dressing" tactics.

In absolute terms, net liabilities increased 439 million or 33.3% from 2009 to 2016. But note that this 4.2% compounded annual growth rate of the net liabilities is below the compounded annual growth rate of sales, operating and net income.

Source: Author (in GBP Millions)

In relative terms, as the operating income increased faster than net liabilities, the ratio of net liabilities to operating income improved from 7.2 in 2009 to 3.1 in 2016. Even though this is still a significant amount of leverage, the management team did a good job mostly in the period between 2009 and 2014.

Source: Author (in GBP Millions)

Putting everything together, the company value (calculated as a sum of the market cap with net liabilities), averaged 15.9 times its operating income and 3.1 times its sales in the period between 2009 and 2016. In this regard, 2015 was an outlier as speculation pushed the stock to trade at 22.3 times its operating income and 4.4 times its sales. As mentioned previously this frenzy came to an end in 2016 fiscal year with the stock correcting 40% from peak to bottom.

Source: Author

In fact, the company grew more expensive from 2009 to 2016 with the stock price rising at a 28.5% compounded annual rate and the market cap increasing at a 29.4% compounded annual rate (due to the increase in the number of shares outstanding) which is faster than the growth in sales, operating and net income (in absolute terms and on a per share basis).

The 2nd Half Earnings and the Investor's Day

The interim results presented on the 25th of October 2016 showed improvements in the top and bottom lines (in absolute terms and on a per share basis), as we can see from the following table:

Source: Whitbread (revenue and profit in GBP Millions)

Costa led the way with a 10.7% growth in sales, followed by the Hotel business whose revenues grew 8.9% in the same period.

In the last investor's day meeting of the 29th of November 2016, the Management Team reassured investors that the milestones to reach its 2020 targets are on track, which helped the recent recovery in the stock price.

It also shared that Costa investments were going to be prioritized mainly in what concerns product innovation, new UK and international stores, express and roastery. As for the hotel and restaurant businesses, a more balanced approach was going to be followed, focusing on network growth, extensions and reinvestments.

In Summary

Whitbread's technical picture improved recently.

Fundamentally, the current stock price puts the company trading close to the average valuation seen in the 2009/2016 period of 3.1 times its sales and 15.9 times its operating income.

Furthermore, the current stock valuation seems warranted not only in historical terms but also on a forward looking basis, especially after the management team reassured investors that its 2020 goals are on track to be met.

Putting everything together, it is worth keeping an eye on Whitbread but it is still early to jump in as the £43 resistance hasn't yet been broken.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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