2 FTSE stocks that could win from recessions in the UK and Germany

An economic downturn could present great opportunities for this FTSE 100 (INDEXFTSE:UKX) company and this smaller-cap stock, argues G A Chester.

| 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.

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.

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.

Fuller possibilities

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.

Premier prospects

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.

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.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Fuller Smith & Turner. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young black colleagues high-fiving each other at work
Investing Articles

2 FTSE 100 value stocks I’d buy for my Stocks and Shares ISA in March!

Now could be a great time for fans of FTSE 100 value stocks to go investing. Here are a couple…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Looking for value stocks? Here’s 1 I’d buy and 1 I’d avoid!

This Fool delves deeper into two value stocks she’s had her eye on and explains why she’s bullish on one,…

Read more »

Young black woman using a mobile phone in a transport facility
Investing Articles

With the Airtel Africa share price in pennies, is it a bargain?

With the Airtel Africa share price having slumped by a quarter in just one month, this shareholder considers some of…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

Are these 2 defensive FTSE 100 stocks shrewd buys after recent updates?

This Fool takes a closer look at these FTSE 100 stocks. She admires their defensive traits -- but does that…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

The FTSE 100 closes up after full-year results from leading UK firms – are they buys?

Earnings season brings about a lot of ups and downs for the FTSE 100. Yesterday had some particularly good releases,…

Read more »

artificial intelligence investing algorithms
Investing Articles

Should I buy NVIDIA stock as a British investor?

NVIDIA stock is up two-thirds this year alone. Our writer considers some pros and cons, specifically given that he is…

Read more »

Investing Articles

With £2,000 in excess savings, I’d buy 41 shares in this Warren Buffett dividend stock

Stephen Wright thinks one of the best dividend shares to buy right now might be a Warren Buffett stock that’s…

Read more »

Investing Articles

How many Aviva shares do I need to collect a £100 monthly income?

Aviva shares are well suited for passive income purposes. Our writer works out how many would be needed for a…

Read more »