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.

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.

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

Investing Articles

Down 23%, are Greggs shares a long-term bargain?

Christopher Ruane slices into some possible pros and cons of buying Greggs shares for his portfolio after they slid by…

Read more »

Investing Articles

This boring FTSE 250 stock has an incredible earnings forecast!

This FTSE 250 stock has moved sideways for years. It certainly hasn’t rewarded shareholders. However, things could change in the…

Read more »

Investing Articles

Make or break: could US trade tariffs hurt the UK stock market?

Mark Hartley examines the knock-on effect that Trump tariffs could have on the UK stock market and considers a stock…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

I don’t care if my passive income stock Phoenix Group doesn’t rise this year – I’ve got the 10.1% yield!

A firm’s yield moves in the opposite direction to its share price, so with my core passive income holdings I…

Read more »

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

Vodafone’s share price is down 13% to 69p despite promising Q3 results, so it is an unmissable bargain for me?

Vodafone lost ground after its recent results, but they seemed promising to me, which leaves the share price looking significantly…

Read more »

Buffett at the BRK AGM
Investing Articles

Is Warren Buffett right about this 1 thing when it comes to Lloyds shares?

With the words of Warren Buffett ringing in his ears, our writer considers whether the Lloyds share price will do…

Read more »

Investing Articles

The FTSE 100 is behaving remarkably right now!

After years of underperforming global markets, the FTSE 100 has suddenly sprung to life. Indeed, it's rushed ahead to overtake…

Read more »

Investing Articles

3 passive income ideas to consider with FTSE 100 shares

A steady or lump sum investment in FTSE 100 shares and funds can create a formidable second income for investors.…

Read more »