Shares in Premier Inn owner Whitbread (LSE: WTB) were down sharply in early trading this morning as investors recoiled from a rather uninspiring update on trading for Q3 of its financial year.
Is today’s reaction a sign that holders should consider banking profits after a strong post-election run or does the new-found clarity on our departure from the EU make today’s fall an opportunity?
I’m inclined to suggest the former.
“Challenging market conditions”
Total sales growth — taking into account the company’s UK and international operations — came in at 1% over the 13 weeks to 28 November, bringing the figure for the year to date to 0.3%.
In the UK alone, sales growth was sluggish at just 0.3% over the quarter, attributed by CEO Alison Brittain to “challenging market conditions” where outperformance in the central London market had to make up for weakness elsewhere in the country.
On a more positive note, the Dunstable-based business did say that it was pleased with the performance of its three hotels in Germany and that its pipeline in the country now stands at roughly 8,500 rooms across 48 hotels with 20 of the latter expected to open in 2020. In other news, cost savings should also allow it to deliver full-year numbers in line with expectations.
Looking ahead, the company remarked that it remained “confident” on its growth strategy although business confidence in the near term (and the consequent impact on trading) was “difficult to predict”. It also expects cost inflation of around £75m, partly due to the higher National Living Wage.
Of course, Whitbread isn’t the only listed hotel operator finding things tough. Back in October, FTSE 100 peer Intercontinental Hotels (LSE: IHG) — whose brands include Regent and Holiday Inn — reported a 0.8% decline in revenue per room in Q3 as a result of the protests in Hong Kong and stodgy trading in the US and China. Similar to Whitbread, however, the company did say that it “remained confident” of its financial outcome for the rest of the year.
So, which of the two is the better buy right now?
Given the choice, I’d say Intercontinental is potentially the safer bet given the geographical diversification on offer (it has almost 5,800 hotels globally). A forecast P/E of 20 isn’t cheap, but returns on capital are consistently higher than at Whitbread. The latter trades on roughly the same valuation for FY21, despite its dependence on the UK market and the fact that it no longer owns the jewel that was Costa Coffee. I also suspect the certainty that Brexit will happen at the end of this month and the firm’s plans to build market share in Germany now look more than priced in, especially when the rise in popularity of alternative options for travellers such as Airbnb is considered.
In terms of income credentials, there isn’t much to separate these top tier giants. A predicted 136 cents per share return in FY20 (104p) leaves Intercontinental yielding just under 2.1%. Whitbread looks set to yield 104p per share, equating to a yield of 2.3% after taking into account today’s price fall. Both payouts should be safely covered by profits.
All told, Intercontinental gets my vote over Whitbread, but the potential headwinds faced by both companies lead me to think that there are probably better opportunities to make money elsewhere in the market in 2020.