Share picker demand for Mitchells & Butlers (LSE: MAB) has receded sharply in recent sessions.
After hitting its highest in almost half a year earlier in May, a mixed trading update has since sent the pub and restaurant operator’s stock value shuttling 13% lower to current levels around 240p. But I believe now could represent a great time for savvy dip buyers to move in.
Plenty of upside
Of primary concern to investors is the steady rise in its cost base, a point the company again underlined this month. It said “margins [in the six months to March] have been adversely impacted by increased costs, most notably from wage inflation, property costs and exchange rate movements.” And these troubles are unlikely to end any time soon.
However, I believe the market is overlooking the Toby Carvery and All Bar One owner’s continuing sales improvement. Like-for-like revenues rose 1.6% between October and March, a departure from the 0.8% side endured in the full year to September 2017.
Mitchells & Butlers has thrown wads of cash at its restaurant estate to keep pulling diners through its doors, and the expansion of its Miller & Carter brand of steakhouses offers plenty of further top-line opportunity. The company plans to have 100 sites up and running by the end of 2017 from around 67 right now.
The City does not expect its earnings woes to end any time soon however, and a 1% decline is anticipated for the year to September 2018, following on from last year’s 2% reversal. And earnings are only expected to tentatively improve further out, a 1% advance being expected in fiscal 2019.
Still, these projections leave the pub powerhouse dealing on a prospective P/E ratio of just seven times, well below the bargain-basement watermark of 10 times. Such a reading more than bakes in the troubles surrounding Mitchells & Butlers’ cost worries in my opinion, and leaves plenty of scope for a fresh share price charge should sales — as I expect — continue to trek higher.
I am not so optimistic on the investment outlook for Vedanta Resources (LSE: VED), however, and believe the commodities colossus could add to the 40% share price fall endured since the firm printed mid-February’s two-and-a-half-year peaks.
A falling zinc price has been a major driver of the company’s descent in recent months (the galvanising metal generates around two-thirds of Vedanta’s profits). But falling metal values are not the only cause for concern as rising shale output from the US has also put the company’s fossil fuel operations under the microscope.
The number crunchers expect earnings at Vedanta to charge to 163.5 US cents per share in 2017, up from 1.1 cents last year and resulting in a P/E ratio of 5.1 times. And the bottom line is expected to keep surging, with earnings of 206.2 cents forecast for next year.
However, I believe these figures could be set for swingeing downgrades should commodity prices continue to falter, a stark possibility as the health of China’s economy is back on the agenda (just last week Moody’s cut the country’s credit rating). And looking elsewhere, political pressure in Washington could also see President Trump’s ambitious infrastructure plan hit the buffers and drag raw material values even lower.
I reckon the risks continue to outweigh the possible rewards at Vedanta, even at current prices.