FTSE 100 multinational hotel and restaurant group Whitbread (LSE: WTB) dropped 9% after the 16 October release of its H1 fiscal year 2025/26 results.
Although it has recovered slightly since, I regard such a drop as a potential opportunity to secure a bargain. This depends on whether the fundamentals of a stock genuinely point to it being worth less than it was before.
If they do, then the stock is not a bargain, and the price drop is justified. But if the fundamentals look good, then it could be cheap at the reduced price.
The best way I know of determining this is the discounted cash flow (DCF) method. This identifies the ‘fair value’ of any stock, based on cash flow forecasts for the underlying business.
These, in turn, factor in the business’s earnings growth profile in the coming years. And it is ultimately this that drives any firm’s share price (and dividends) higher over time.
The valuation and what it means
The DCF for Premier Inn owner Whitbread show that the stock is 32% undervalued at its current £31.32 price.
Therefore, their fair value is £46.06.
Aside from its clarity, the DCF also benefits from being a standalone valuation. Namely, it is not skewed by broad over- or under-valuations across the sector in which a firm operates.
This is crucial for me in crystallising whether there is value in the specific asset at which I am looking.
This is important because asset prices tend to converge to their fair value over time, in my experience. It comprises several years as a senior investment bank trader and 35+ years as a private investor.
So what about these results?
I think the unfortunate headline-grabber in the H1 results was that adjusted profit before tax dropped 7% year on year to £316m.
But underneath the headline was a perfectly reasonable explanation, with a very positive long-term impact, in my view.
Specifically, much of this profit drop resulted from the continued implementation of Whitbread’s Accelerating Growth Plan (AGP). This involves replacing 200+ lower-returning branded restaurants to unlock around 3,500 high-value new hotel rooms in existing properties.
By doing this, the firm expects to add an extra adjusted profit before tax of at least £300m by the end of fiscal year 2029/30.
It also projects that the resulting step change in profits and margins by then will generate £2bn for shareholders through share buybacks and dividends.
I think a risk here is any further surge in the cost of living that may deter customer restaurant and/or hotel bookings.
However, consensus analysts’ forecasts are that Whitbread’s earnings will grow by 13.1% a year to the end of fiscal year 2027/28.
My investment view
I believe Whitbread looks a significant bargain, with strong earnings prospects set to push the share price and dividends higher.
It is not for me as I prefer stocks with a higher dividend yield than its current 3.3%. This is because I want to use such income to continue reducing my working commitments, aged over 50 as I am.
However, I think the stock is well worth the consideration of other investors for whom this is not an issue.
