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Why I’d Sell Enterprise Inns plc And Buy Whitbread plc And Standard Chartered PLC

Shares in Enterprise Inns (LSE: ETI) have been up by as much as 6% today after the pub company released a satisfactory update. It reaffirmed its full year guidance and commented that restructuring was going ahead as planned and on target.

Furthermore, trading in the first 44 weeks of the year has been positive, with like-for-like net income growth being 0.6%. Despite Enterprise Inns receiving a boost from improving consumer confidence and decent weather, such a figure is nevertheless impressive as last year’s figure included the positive impact of the football World Cup.

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However, for the full year Enterprise is still expected to deliver a 1% fall in earnings, with growth of just 2% being pencilled in for next year. This is clearly disappointing and, with the UK economy going from strength to strength, is somewhat surprising.

More worrying for investors, though, is the high amount of debt on the company’s balance sheet, with Enterprise Inns having a debt to equity ratio of 180%. With interest rate rises expected next year, investor sentiment could begin to weaken as increases in interest costs may not be able to be fully passed through to customers, resulting in margin reduction for Enterprise Inns.

Furthermore, Enterprise Inns remains relatively unprofitable, with the company’s return on equity standing at just 2.1% last year. This compares extremely unfavourably with former pub operator Whitbread (LSE: WTB), which now focuses on hotels (via Premier Inn) and coffee shops (via Costa). Its return on equity stood at 18.5% in its latest financial year and, with a debt to equity ratio of just 30%, it is less leveraged as well as being more profitable than Enterprise Inns.

Looking ahead, Whitbread is expected to grow its earnings by 14% in each of the next two years and, with it trading on a price to earnings growth (PEG) ratio of 1.4, appears to offer excellent value for money. Furthermore, its Premier Inn hotel chain, in particular, has significant scope for price rises, since it continues to offer enviable locations as well as a superior standard of service to its budget rivals. As a consequence, Whitbread’s sales and profits look set to keep moving upwards.

Like Enterprise Inns, Standard Chartered (LSE: STAN) is also experiencing a period of change as it seeks to restructure its business. While this will inevitably mean some short term pain, for example dividends were slashed by 50% this week, it remains a hugely appealing investment opportunity.

Not only does Standard Chartered have exposure to a region that is undergoing a banking revolution at the present time, it also has a slimmed down management team and the scope to benefit from improved investor sentiment as its turnaround plan begins to be put in place. Of course, its forecasts remain very encouraging, with 15% growth in earnings expected after what is set to be a tough 2015. And, with Standard Chartered having a PEG ratio of just 0.6, it offers tremendous value for money and, alongside Whitbread, appears to be a better buy than Enterprise Inns.

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Peter Stephens owns shares of Standard Chartered. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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