The UK economy continues to move from strength to strength, with companies up and down the country experiencing possibly the best trading conditions since the start of the credit crunch in 2007. As such, the UK appears to be a great place to invest at the current time. While interest rate rises are on the horizon, the Bank of England is at pains to point out that they will increase only at a modest pace, which is unlikely to derail the UK’s economic recovery.
Vast growth
One company which benefitted from the economic downturn, though, was Whitbread (LSE: WTB). Its Premier Inn division saw vast growth during the credit crunch, as huge swathes of individuals and business customers traded down to budget hotel rooms in order to save money. As well as a low price, Premier Inn offers a good quality product, with its rooms being clean, its hotels well located and its customer service being far better than many customers would expect from a budget hotel chain.
Similarly, Whitbread’s Costa Coffee division has also developed an excellent product, with numerous surveys showing that people prefer the taste of Costa coffee compared to rivals. This has helped Whitbread to post earnings growth of 18.5% per annum during the last five years.
While double-digit growth is forecast for the next two years, Whitbread has two potential challenges to overcome. Firstly, it has a new CEO, and a change in management after such a successful period will undoubtedly cause a degree of uncertainty about its future strategy and growth potential. Secondly, and more important, is the fact that Whitbread’s cost base will rise due to the impact of the living wage. Whether it can pass all of this cost on to its customers remains to be seen, which means that its shares could be worth watching rather than buying at the present time.
Under pressure
It’s a similar story for pub chain JD Wetherspoon (LSE: JDW). It reported today that operating margins have fallen in recent weeks even though comparable sales have risen. A key reason for higher costs is a higher starting rate for hourly-paid staff, which has increased the company’s operating costs by around 13%.
This trend could continue, as wages rise across the UK. And, with Wetherspoons trading on a price to earnings (P/E) ratio of 15.8, its shares could continue to come under pressure after having fallen by 9% since the turn of the year. With the UK economy picking up and other sectors offering strong growth potential, there appear to be better opportunities for investors to generate capital growth over the medium to long term.
Fully valued
Similarly, the investment case for BT (LSE: BT-A) is also somewhat opaque. On the one hand, its strategy of offering a quad play service is logical and should allow it to grow profitability in the long run. However, with a balance sheet that includes a major pension liability as well as considerable debt levels, the pace of change at the company could prove to be relatively risky.
On top of that, although the high level of investment in sports rights may work while the company has such offerings, if BT is subsequently outbid by rivals its sports-loving customers may prove to be less sticky than previously thought.
As such, BT’s current P/E ratio of 15.1 appears to fully value the company’s shares – especially since net profit is forecast to fall by 3% in the current year.
