The shares of these three companies are set for a bounce.
The shares of ABF have been hammered in the last week of trading. They may seem expensive, but they are not. Whitbread stock has also been under pressure. It is not a bargain, but it should be held in a diversified portfolio.
The bears argue that ABF and Whitbread will struggle to repeat their past performances. Make no mistake: I am still upbeat about the equity valuation of both companies. Their long-term prospects won’t disappoint investors, in my view, while their short-term performances on the stock exchange could surprise, too, particularly if fears associated to monetary policies in the Western world fade away.
And how about Quindell, whose shares are stuck at around 170p? Read on…
Associated British Foods
ABF stock has lost about 9% of value since 8 September, when ABF reported its trading update. The company has problems in its sugar division, but I doubt things can get any worse.
Investors must expect some volatility in ABF stock, but ABF’s valuation has plunged well below fair value in the last few days. Negative recommendations from brokers such as Goldman Sachs also contributed to ABF stock’s poor performance. I stick with the view that the Primark owner is a sound bet.
ABF is expected to grow sales at a CAGR of 6.4% to the end of 2016, which is in line with estimates for the growth rate of its adjusted operating cash flow. Earnings per share will likely grow at a faster pace. Its balance sheet is healthy, and debt is falling. Guidance was recently confirmed.
ABF stock trades at 13.2x and 12.8x based on its adjusted operating cash flow; these multiples are in line with those of more profitable food producers which, however, have much less appealing growth prospects.
ABF has plenty of room to increase its payout ratio and could also entertain some buyback activity, or a combination of both. Disposals shouldn’t be ruled out, either. It’s not a great dividend play, so what?
Whitbread & Quindell
Similarly to ABF, Whitbread’s growth prospects and business fundamentals are sound. As opposed to ABF, the owner of Premier Inn, Beefeater Grill and Costa Coffee is a takeover target. It’s also much more profitable than ABF.
With a market cap of £7.5bn, Whitbread is an ideal target for private equity firms. Its balance sheet leaves of plenty of room for capital arbitrage, i.e. it could carry more debt. It’s a break-up candidate, too.
At 12x and 10.8x adjusted operating cash flow for 2015 and 2016, Whitbread stock offers more upside than downside, in my view. Its stock has lost about 5% of value since September 8, and it may be a good time now to build a long position.
Quindell is a completely different investment proposition from ABF and Whitbread. Its stock is fairly valued based on several metrics, but if management continue to deliver as they have done in recent trading updates, the shares could comfortably trade around 230p, for an implied 35% upside. Quindell’s working capital management is problematic, but if Quindell is right, it won’t take long to fix it. A price target north of 200p per share will be easy to achieve if the company attracts a takeover bid, which is a distinct possibility.