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.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

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.

More on Investing Articles

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

Should I sell Legal & General Group and buy even more Phoenix shares instead?

Harvey Jones is thrilled he bought Phoenix shares as the FTSE 100 insurer has done better than he hoped. He…

Read more »

Photo of a man going through financial problems
Investing Articles

This FTSE 250 stock has a stunning 10.8% yield! Time to consider buying?

Harvey Jones is dazzled by the amount of income on offer from this FTSE 250 stock, but not too dazzled…

Read more »

Young female hand showing five fingers.
Investing Articles

£10,000 invested in these 5 FTSE 100 shares in June 2020 would now be worth…

Our writer considers the best-performing shares on the FTSE 100 since the summer of 2020, and takes a closer look…

Read more »

Illustration of flames over a black background
Investing Articles

Just released: June’s higher-risk, high-reward stock recommendation [PREMIUM PICKS]

Fire ideas will tend to be more adventurous and are designed for investors who can stomach a bit more volatility.

Read more »

Trader on video call from his home office
Investing Articles

A 7.3% yield but down 22% from September, is it time for me to buy more of an overlooked FTSE gem?

This FTSE 100 commodities giant has been hit by concerns over Chinese growth and US tariffs. But are both overdone,…

Read more »

Middle-aged black male working at home desk
Investing Articles

Where’s the Lloyds share price heading in 2025? Here’s what the experts say

With the Lloyds share price already posting strong gains in 2025, Mark Hartley explores where it could go next --…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Down 8% from its one-year high, is Unilever’s share price too cheap for me to pass up?

Heavyweight FTSE 100 conglomerate Unilever has seen its share price slide 8% in recent months. But does this mean it's…

Read more »

Tariffs and Global Economic Supply Chains
US Stock

Is it worth me buying S&P 500 stocks with the index close to record highs?

Jon Smith explains why he's more focused on active stock picking when it comes to the S&P 500 index right…

Read more »