Are Centrica PLC, Stagecoach Group Plc, British American Tobacco plc & Whitbread plc A Better Trade Than The Banks?

Are Centrica PLC (LON:CNA), Stagecoach Group Plc (LON:SGC), British American Tobacco plc (LON:BATS) and Whitbread plc (LON:WTB) are under the spotlight ahead of results.

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All eyes will likely be on Barclays and Lloyds next week when the two British banks announce their quarterly results, but several other companies outside the banking industry also report their trading updates and deserve full attention.

To name a few, Centrica (LSE:CNA), Stagecoach (LSE: SGC), British American Tobacco (LSE: BATS) and Whitbread (LSE: WTB) are four companies whose valuations are more appealing than those of the two banking behemoths, in my view. Here’s why. 

Centrica: More Upside Than Barclays & Lloyds

I am not a fan of Centrica, and I think its high yield, at 4.8%, signals risk rather than opportunity. Goldman Sachs today raised its price target to 292p a share, which is some 30p above the average price target from brokers as well as Centrica’s current stock price of 258p.

The shares trade on forward earnings multiples of 14.8x, and could be considered fairly valued under the assumption that they have actually bottomed out. A similar conclusion could be drawn by taking into account Centrica’s core cash flow multiples, which are rather low. 

I am not sure that Centrica is ready to surge, but it has been trading around its multi-year lows since early March, and extraordinary corporate activity may provide a fillip. Centrica or the banks? Centrica would be my call. 

Is Stagecoach Bouncing Back? 

Stagecoach is a business I like based on its current and forward valuation. The average price target from brokers is 406p, for an implied upside of 8.5% from its current level of 374p. That’s not why I’d buy its shares, however.

Operational hurdles in the UK and the US resulted in a profit warning in early December, so the upcoming trading update will be particularly important; most of the bad news appears to be priced into the stock, in my view, and that shows in its 15x and 13x net earnings multiples for 2015 and 2016, respectively.

Its forward yield, at 2.7%, is less appealing that of Centrica, but is safer based on cash flow metrics and its dividend cover ratio. Stagecoach offers more upside than Barclays and Lloyds, and it’s less risky than either bank, in my opinion.

British American Tobacco & Whitbread Promise Solid Returns

These are two business that I support wholeheartedly — not least because coffee and fags keep me going until late night at work!

Of course, that’s not why I’d buy both stocks!

In fairness, British American Tobacco looks expensive, but then the business churns out £3bn of free cash flow almost every year, which supports a forward divided yield at 4%. Over time, rising dividends are likely if projected capital expenditure stays in the region of £750 annually, according to my calculations. 

Admittedly, at 19x forward earnings its share are not a bargain, but they should be added to your diversified portfolio at between 3,500p and 3,750p. They currently trade at 3,722p.

Shareholder-friendly activity should not be ruled out, either. Talking of which, I am not sure whether Whitbread will surprise investors or not in the next few quarters — its rising free cash flow suggests that it could — yet this remains a great growth story, with a forward valuation of 26x and 22x, based on earnings multiples. 

Does it sound expensive? I don’t think so, and I’d rather continue to bet on its outstanding growth prospects than on the banks. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has recommended Centrica and Stagecoach. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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