While many companies with a high street presence may be suffering as a result of the explosion in online shopping, the popularity of cheap treats such as coffee and pastries make earnings for those that serve them up arguably more predictable.
Reporting its final results to the market this morning, £7.7bn cap Whitbread (LSE: WTB) — owner of Costa Coffee — is one such example. But is it a better buy than smaller peer Greggs (LSE: GRG)? Let’s check the numbers.
“Another year of strong growth”
In the 12 months to the beginning of March, total revenue rose a very healthy 8.2% to £3.1bn. Underlying profits before tax came in at £565.2m — 6.2% higher than the previous year.
Focusing on Whitbread’s main brands, total sales at Costa grew 10.7% (profits up 5.3%) with sales growth at hotel chain Premier Inn hitting 9.3% (2.3% on a like-for-like basis). Overall cash from operations came to just over £860m.
While performance on home soil was sound, it’s Whitbread’s plans for international expansion that are arguably more exciting for investors. With hotels now in Germany and the Middle East and 255 Costa shops opening worldwide last year (China remains a major growth target), the FTSE 100 constituent is an attractive option for those who prefer to source growth from businesses at the top end of the market.
In addition to growing organically, CEO Alison Brittain said the company would continue working on its efficiency programme in the year ahead. She went on to reflect that the company had made a “good start” to 2017 but that it “expected a tougher consumer environment than last year“. The latter comment may make some nervous, leading to today’s 7% share price fall. But I think the company’s reputation for affordable quality and our tendency to become attached to certain brands should see it through any economic or political headwinds. Better to underpromise and overdeliver.
Before today, Whitbread’s shares had climbed 14% since the beginning of 2017. They currently trade on 16 times forward earnings. That’s not completely unreasonable given the company’s aforementioned brands and growth strategy. It’s also virtually identical to the valuation attached to shares in Greggs. So which would I choose?
Go for growth?
Well, Premier Inn undoubtedly gives Whitbread a degree of earnings diversification not available to the sausage roll purveyor. The recent weakness in sterling also benefits the former as more tourists choose to come to the UK from abroad and stay in its hotels. Last year, the company opened a total of 3,816 new UK rooms and achieved occupancy of over 80% with levels of direct bookings at 94%.
Elsewhere, it won’t come as much of a surprise to learn that operating margins are significantly higher at Whitbread than at Greggs.
On the flip-side, the latter’s £46m net cash position makes it hugely appealing for those who place a premium on the solidity of their companies’ balance sheets. Greggs can also boast better free cash flow and consistently high(er) returns on capital over the years. At 2.9% for 2017, the yield is also slightly more than that offered by Whitbread (2.3%).
In sum, choosing between Whitbread or Greggs isn’t particularly easy thanks to their similar valuations and consistent earnings growth. That said, the prospect of further growth overseas may just tip the balance in favour of the former. As such, today’s share price weakness may be a decent opportunity for prospective investors.
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Paul Summers has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.