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Why these 2 hospitality firms look set to surge

Shares in some firms with most of their business operations in Britain have eased off this year on fears of an economic slowdown. That’s a reasonable reaction to the uncertainties of Brexit but some forecasters think any decline in the UK’s economic activity may not be as sharp as feared.

The sell-off in shares presents an opportunity to find good value. If we focus on a firm’s underlying growth story and plan to hold shares for years rather than for weeks or months, buying share price weakness now could work out well down the line.

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Expansion at home and abroad

FTSE 100 company Whitbread (LSE: WTB) operates hotels, restaurants and the Costa coffee shop chain, and has seen its shares come down around 29% since peaking at the beginning of 2015. The underlying growth story remains strong at Whitbread and the market’s recent cautious response to the shares could have already allowed for short-term economic uncertainties.

After robust expansion in the UK, Whitbread now has its sights on growing abroad and has been refining its strategy. The firm says it aims to concentrate the Premier Inn international growth strategy on a smaller number of specific markets where it can generate good returns and where there’s the greatest opportunity to build scale. That means a push to grow in Germany and the Middle East and a phased withdrawal from India and South East Asia. On top of that, the firm continues to expand Premier Inn in the UK and Costa both at home and abroad.

City analysts following Whitbread predict a 2% uplift in earnings for the year to February 2017 and 7% to February 2018. Meanwhile, at today’s share price of 3,867p, you can pick up the shares on a forward price-to-earnings (P/E) ratio of just under 15 and receive a forward dividend yielding around 2.7%. Those forward earnings should cover the payout 2.5 times. Whitbread’s not a screaming bargain but the recent softness in the share price could be a decent opportunity to hop onto the long-term growth story.

A brisk rollout

An opportunity with a smaller company exists with restaurant chain operator Tasty (LSE: TAST), which you can find on the FTSE AIM market. Like Whitbread, Tasty’s shares are off their peak, down around 22% from highs achieved near the end of 2015. Tasty is rolling out a chain of restaurants mainly branded Wildwood, and I’ve been impressed so far by the consistency of the firm’s financial results as the business grows, with the top line, bottom line and cash flow all expanding steadily over the last few years.

There’s no sign of any slowdown in the firm’s expansion. City analysts predict a 48% ballooning of earnings this year and 29% during 2017. At today’s 155p share price, the shares trade hands on a forward P/E ratio of just below 18 for 2017. That’s a lot cheaper than it was and may be a good opportunity buy into the growth story with Tasty.

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Kevin Godbold owns shares in Tasty. The Motley Fool UK has recommended Tasty. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.