Recessions represent a threat to companies that have over-extended themselves with debt. In contrast, strong companies can get even stronger by taking advantage of opportunities presented by an economic slump.
The UK and Germany saw a contraction in GDP in the second quarter of this year, sparking fears both economies are on the brink of recession. This could play into the hands of what I consider two very strong businesses. Namely, Premier Inn owner Whitbread (LSE: WTB), a FTSE 100 giant, and Fuller, Smith & Turner (LSE: FSTA), a smaller-cap pubs and hotels group.
Founded in 1845, and still a family-controlled business, Fuller, Smith & Turner is renowned for its prudent management, strong balance sheet and seven decades of unbroken annual dividend increases. At a current share price of 1,130p, its market capitalisation is £365m (or over £600m if we include two classes of share that aren’t traded on the stock market).
Earlier this year, it sold its beer business to global drinks group Asahi for £250m — a “substantial premium to the value attributable to the company’s shareholders if the beer business had remained under Fuller’s ownership.”
The board plans to distribute between £55m and £69m (100p to 125p a share) to shareholders, and I expect to hear more on this in an AGM statement next week. Chief executive Simon Emeny also impressed upon investors that the sale of the beer business has “the added advantage of putting us in a strong position to deal with potentially turbulent times ahead as the UK navigates the implications of exiting the European Union.”
He added: “I cannot think of a better time to be entering a transitional year, having bolstered the balance sheet and reduced our debt, putting our business in pole position to take advantage of attractive opportunities that arise.”
I think a rating of 18.5 times this year’s forecast earnings, represents good value for a company with its impressive history and in its current position. I’d be happy to buy the stock today and hold it for the long term.
The same goes for £5.7bn-cap Footsie company Whitbread, whose £3.9bn disposal of Costa Coffee earlier this year puts it in a strong position to grow its Premier Inn business, not only in the UK, but also in Germany.
The German hotel market is a third larger than that of the UK, and even more fragmented. Small independent operators are suffering a structural decline to the benefit of branded hotels, and an economic slump could increase the pressure on smaller operators.
Whitbread is looking to accelerate growth in Germany, including by “acquisitions of small to medium existing hotel portfolios.” Indeed, it’s already announced an acquisition of 19 hotels from Foremost Hospitality Group, which is expected to complete in February 2020.
At a share price of 4,276p, Whitbread trades on 19.8 times this year’s forecast earnings. Again, I think this represents good long-term value for a strong business that’s positioned to take advantage of any attractive opportunities to accelerate growth, particularly in the German market where it’s at an early stage of expansion.