Could restaurant and pub chain Mitchells & Butlers (LSE:MAB) still be a bargain for growth investors?
It posted a positive trading update today, reporting higher full-year adjusted operating profit sustained by stronger food sales at its 1,700 pubs and restaurants throughout the UK. Its share price is up over 6% as I write.
The £2bn company has a price-to-earnings ratio of 19, which is below the industry average of 29. Earnings per share are 24p, but it’s not a share for income investors because it doesn’t offer a dividend. It actually used to, but it cancelled its dividend payments for 2018 due to a high level of debt, pension obligations and an uncertain outlook. It has since been ploughing money back into the business through a tailored investment programme, during which it has opened seven new sites while converting and remodelling 239 outlets.
It has a 58% debt ratio and its PEG value is very appealing at 0.3, as a value of less than 1 can indicate a company is undervalued.
The Mitchells & Butlers share price has risen 64% in the past year and 33% since August.
In the year to 28 September, pre-tax profit rose 36.2% to £177m which is up 3.9% on the previous year. Food sales were up 3.4% and drink sales 3.2%. Average spend on food and drink was also up 3.4% and 4.5% respectively.
Mitchells and Butlers operate 17 brands, which include some of the country’s best-known restaurants and pubs, such as Harvester, Toby Carvery, O’Neill’s and All Bar One.
Considering the Brexit environment and belt-tightening throughout the UK, I think it is doing well and this points to a cautiously optimistic future ahead.
Although the food and drink industry will continue to face the challenge of rising costs, an increase in health-conscious consumers means many are seeking top quality when eating out. This includes locally sourced, superior ingredients.
All Bar One gives an example of how it is tackling this with a new eco‐minded and sustainable beer and cider menu. This includes beer whose costs partly go to planet-improving charitable causes with packaging/manufacturing waste recycled, while Pip & Wild is a range of premium fruit ciders that are naturally low in calories and use natural ingredients.
Consumers like to feel good about what they’re eating and drinking and in turn, are prepared to pay more for the privilege.
The company has proved it is on the right track as it continues to build sustained sales growth, which converts into profit growth. As its share price has already seen a spectacular spike in the past year, can it continue to rise? I think it probably can, although with the current economic climate it will continue to face challenges. Yet even if the UK goes into a recession, people will continue to eat, drink and socialise and many of these brands are household favourites that I think will continue to be a go-to for get-togethers with friends and family.
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Kirsteen 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.