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Hold on! I think this stock could soon be a great buy

I like companies with history. In an age where tech start-ups are all the rage for investors, there is something reassuring about a company with few hundred years under its belt.

As it was founded in 1742, Whitbread (LSE: WTB) certainly goes back a long way. But can it compete with its modern-day rivals?

A coffee for the road

Of course, over the past almost-300 years, the company has reinvented itself and evolved. Nowadays, I’m sure you would have come across one of the company’s brands, like Premier Inn or Beefeater.

Recently, Whitbread also owned Costa. It had planned to split this part of its business out, when Coca-Cola swooped in and bought it, paying £3.9bn.

As my colleague G A Chester noted, the offer was too good to refuse. At the time, £3.9bn represented 50% of Whitbread’s enterprise value, while Costa generated less than 25% of group profit. A shrewd divestment, indeed.

However, on a year-to-date basis, the shares are down by almost 9%. What is the reason for the recent dip in the share price?

Sleepyhead

In its latest results, the company reported that despite increases in capacity, revenues were flat. Group profit actually fell by 4.1%, against the backdrop of tough trading conditions and a competitive leisure market.

When it comes to future growth, the company has begun its expansion programme in Germany, with three hotels trading and 27 more to be acquired, and investors will be pleased to note that occupancy at its property in Hamburg has “matured beyond expectations”, now reaching over 70%.

The group aims to replicate the UK hotel business in Germany. The market in Germany is a third larger than the UK, and the firm says it is even more fragmented.

The drop in share price makes for a price-to-earnings ratio of 24, which is still a bit on the high side for me. The prospective dividend yield is 2.3%.

Whitbread has now completed its £2.5bn return to shareholders, most of which came from a share buyback, following the sale of Costa. A share buyback is music to my ears: it often tells me that the company thinks it could be undervalued, and can sometimes help to keep the price buoyant.

Discretionary free cash flow sits at £197m. Most of Whitbread’s hotels are owned, rather than leased, meaning that a large proportion of value is tied up. However, the positive here is that with a significant property portfolio, the group should be able to carry a bit of debt.

For those in the travel and leisure industry, business will be affected by the wider economic conditions. Whitbread is no different. But I would hope that by pitching itself at the budget end of the market, it might weather an economic downturn better than its higher-end rivals.

In any case, although buying shares in Whitbread undoubtedly carries risks, I think it could pay off for brave investors. Personally, I think it is worth waiting to see if the share price dips a little further before purchasing, to build up a margin of safety.

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T Sligo has no position in any of the 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.