Shares in Premier Inn owner Whitbread (LSE: WTB) are having a tough time at the moment. While the FTSE 100 index has risen about 8% this year, they’ve fallen about 20%.
Is this an opportunity for those who like value? Let’s take a look.
No basket case
When a stock’s down significantly like this, it’s often because something’s drastically wrong. But this doesn’t seem to be the case here.
Sure, top-line growth’s expected to be a little muted in the near term since the last few years have been a strong period for hotels (after the pandemic). But Whitbread told investors in June it was confident in its full-year outlook. It also said its strategic plans (it’s aiming to add another 3,500 rooms across the UK) should help to boost performance going forward. So I’m not really concerned about the outlook for the company.
With significant potential in both the UK and Germany, supported by the structural reduction in supply and our asset-backed balance sheet, our strategic plans are set to deliver a step change in our performance.
CEO Dominic Paul in Whitbread’s 18 June trading update
Value on offer
As for the valuation, the stock looks good value to me.
For this financial year and next (each ends 28 February), analysts expect the company to generate earnings per share (EPS) of 209p and 236p. So the price-to-earnings (P/E) ratio is 14, falling to 12.4 using next year’s EPS forecast. That latter multiple – which is below the market average – strikes me as attractive for a company with a powerful brand and plenty of long-term growth potential.
But the P/E ratio isn’t the only attractive metric here. I also like the free cash flow yield of 6.6% and the forward-looking dividend yield of 3.4% (3.7% using next financial year’s dividend forecast). With that dividend yield, investors could be paid to wait for a turnaround in the stock.
It’s worth noting that I’m not the only one who sees value on the table. Recently, analysts at Citigroup raised their target price for Whitbread to 4,900p from 4,800p. That new price target’s nearly 70% higher than the current share price.
An opportunity?
Of course, there are risks here.
This hotel company’s not as diversified as some of the larger players (eg IHG). With the bulk of its hotel rooms in the UK, it’s vulnerable to an economic slowdown in Britain.
However, my view is that people are going to continue to spend money on travel in the years ahead. And I reckon that budget hotel rooms will always be in demand.
So I think the recent share price fall could be an opportunity worth considering. With a low valuation and decent dividend yield, I think this FTSE 100 stock has plenty of long-term potential.
