Today’s stock market volatility is suddenly throwing up unexpected chances to buy companies I’ve had my eye on for a while.

Tesco’s nice share price

Grocery giant Tesco (LSE: TSCO) is one of them. It’s had a strong five-year run, enough for me to feel it had got a bit pricey. A 7.5% slide over the last week makes it more appealing, with a price-to-earnings ratio trimmed to 15.8. Tesco shares are still up 28% over 12 months, which shows how resilient the business has been.

The trailing yield has nudged up to 3.15%. It isn’t the highest, but looks sustainable to me. Tesco is still locked in a tough price war triggered by Asda, and profit margins are narrow at 3.9%, so it’s not without risk. If today’s economic problems tip into recession, shoppers may pull back even more. But the cheaper it gets, the more interesting it becomes. With a long-term view, naturally.

Private equity opportunity

Private equity and alternative asset specialist Intermediate Capital Group (LSE: ICG) has been on my watchlist for two years. This is a tricky period for private equity because high interest rates make borrowing more expensive, and wider uncertainty makes it harder to float or sell successful investments. Recent anxiety over the $4.5trn US shadow banking sector hasn’t helped sentiment.

The company has a long record of lifting dividends every year. Today, the trailing yield is 4.33% and the P/E sits at 12.2, which looks modest for a business with its pedigree. It operates in a volatile area and may not reach its potential until interest rates fall more decisively. Even so, I think investors with a long-term view could consider buying, especially at today’s lower valuation.

Hospitality struggles

Premier Inn owner Whitbread (LSE: WTB) is down 15% over the last month after reporting a 7% drop in interim pre-tax profits to £316m on 6 October. Revenue fell 2% to £1.5bn. Its German operations have struggled in a slowing economy, and stubborn UK inflation has also hit performance. This is a tough moment for UK hospitality as it deals with rising employer taxes and weaker consumer spending.

The shares have drifted for years and are down 6% over the last 12 months. With a P/E of 14.3, I had expected them to be cheaper. The yield sits at 3.5%. Of the three businesses I’ve looked at today, Whitbread feels the least tempting, although a sharper share price drop could change that.

There may be even better opportunities across the FTSE 100 as uncertainty shakes sentiment. I’m keeping my watchlist close, because this feels like one of those moments when long-term investors might find value where others see trouble.

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Although it has recovered slightly since, I regard such a drop as a potential opportunity to secure a bargain. This depends on whether the fundamentals of a stock genuinely point to it being worth less than it was before.

If they do, then the stock is not a bargain, and the price drop is justified. But if the fundamentals look good, then it could be cheap at the reduced price.

The best way I know of determining this is the discounted cash flow (DCF) method. This identifies the ‘fair value’ of any stock, based on cash flow forecasts for the underlying business.

These, in turn, factor in the business’s earnings growth profile in the coming years. And it is ultimately this that drives any firm’s share price (and dividends) higher over time.

The valuation and what it means

The DCF for Premier Inn owner Whitbread show that the stock is 32% undervalued at its current £31.32 price.

Therefore, their fair value is £46.06.

Aside from its clarity, the DCF also benefits from being a standalone valuation. Namely, it is not skewed by broad over- or under-valuations across the sector in which a firm operates.

This is crucial for me in crystallising whether there is value in the specific asset at which I am looking.

This is important because asset prices tend to converge to their fair value over time, in my experience. It comprises several years as a senior investment bank trader and 35+ years as a private investor.

So what about these results?

I think the unfortunate headline-grabber in the H1 results was that adjusted profit before tax dropped 7% year on year to £316m.

But underneath the headline was a perfectly reasonable explanation, with a very positive long-term impact, in my view.

Specifically, much of this profit drop resulted from the continued implementation of Whitbread’s Accelerating Growth Plan (AGP). This involves replacing 200+ lower-returning branded restaurants to unlock around 3,500 high-value new hotel rooms in existing properties.

By doing this, the firm expects to add an extra adjusted profit before tax of at least £300m by the end of fiscal year 2029/30.

It also projects that the resulting step change in profits and margins by then will generate £2bn for shareholders through share buybacks and dividends.

I think a risk here is any further surge in the cost of living that may deter customer restaurant and/or hotel bookings.

However, consensus analysts’ forecasts are that Whitbread’s earnings will grow by 13.1% a year to the end of fiscal year 2027/28.

My investment view

I believe Whitbread looks a significant bargain, with strong earnings prospects set to push the share price and dividends higher.

It is not for me as I prefer stocks with a higher dividend yield than its current 3.3%. This is because I want to use such income to continue reducing my working commitments, aged over 50 as I am.

However, I think the stock is well worth the consideration of other investors for whom this is not an issue.

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Investors didn’t seem to like the reported 2% fall in revenue compared to the same period a year ago. Adjusted earnings per share also dropped by the same percentage. Net debt was also £192m higher.

Since releasing its FY25 results, the group’s slightly downgraded the full-year profit expected from its business in Germany. To counter this, it reckons it’s going to achieve more cost savings. Such a large share price drop is often associated with a profit warning. But this isn’t the case here.

Great value?

Analysts are expecting earnings per share for FY26 of 205.7p. If they are right, it means the stock’s currently trading on 14 times forecast earnings. When considered alongside a figure of 23 for InterContinental Hotels Group — the owner of the Holiday Inn and Crowne Plaza brands — the stock appears to offer excellent value.

Indeed, Whitbread appears to have lots going for it. The group has a UK occupancy rate of 80.8%. This beats the global figure of 69.8% reported by IHG during the six months ended 30 June. At £69.48, Whitbread also does better when it comes to revenue per available room. IHG’s is $84.10 (£62.65 at current exchange rates).

But as good as these figures might be, it’s the lack of growth that appears to be spooking investors. Whitbreads’ results show that although room revenue was broadly flat, food and beverage sales were 11% lower. The group says this reflects the “impact of transitioning around half of our lower-returning branded restaurants to a more efficient, integrated format”.

I’ve stayed in plenty of Premier Inns over the years. The rooms are reasonably priced and comfortable. But I find the food bland and unexciting. Personally, I don’t think efficiency’s the problem. If it spent a bit more on better quality ingredients, I’m sure more of the hotel chain’s guests would eat in its restaurants. After all, it has a captive audience. Nobody really wants to go off site and dine elsewhere if it can be avoided.

Growth challenges

However, the company remains upbeat. It says it’s on track to deliver a “step-change in profitability” and return £2bn to shareholders via dividends and share buybacks by FY30.

In my opinion, nothing stands out as being particular wrong with the business. Okay, it would be better if earnings were increasing but inflation’s proving to be particularly stubborn at the moment. But while I admire its ambition to become the “world’s leading budget hotel brand”, I just don’t see how it’s going to get there.

It already has an impressive occupancy rate. And there’s limited scope for raising room rates further given high levels of competition. Expansion into other countries is a possibility but it takes time to build a brand in a new territory. Its business in Germany is expected to become profitable this year. However, this is nine years after it opened its first hotel in the country.

And although its dividend yield’s pretty much in line with the FTSE 100 average, this isn’t generous enough for me to overlook the concerns I have about its growth prospects.

For these reasons, the stock’s not for me.

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For a company that’s so sensitive to the weak UK economy, that might not be considered a bad result. In fact, the hotelier and pub operators was up 9% for the year until trading commenced today (16 October).

But these gains have been largely wiped out following a cool reception to the firm’s first-half update. Might Whitbread shares now be a great option for dip buyers to consider?

Sales and profits down

Reflecting the tough landscape, the Premier Inn owner’s revenues dropped to £1.5bn in the six months to August, down 2%. Underlying pre-tax profit declined 7% to £316m.

Whitbread said it experienced “broadly flat UK total accommodation sales and positive momentum in Germany“. As with the UK division, Premier Inn Germany continued to outperform the market.

But profits were hit hard by lower food and beverage sales as the company repurposes restaurant space attached to some of its hotels for higher-margin accommodation.

Sliding price

Whitbread’s results matched forecasts, so what’s caused its share price to slide? It seems investors are fearful over how reliant performance has been on one-off events like Oasis and Taylor Swift concerts over the period. The business said the “a strong events calendar in July and August, and more favourable weather” helped the UK hotel sector return to growth in the second quarter.

Red lights are flashing that suggest the recent upturn may prove short-lived. Conditions in Germany are weaker than expected, and may remain tough as Europe’s largest economy splutters. And in the UK, consumers may tighten their pursestrings amid a weakening labour market and rising inflation.

Time to buy Whitbread?

I think an argument could be made that the market has overreacted to today’s interims.

Broader industry conditions indeed remain tough. However, Whitbread has a knack of outperforming the broader competition. In the first half, its rooms generated £6.10 more on average than those offered up by other mid-market and economy operators.

Furthermore, Premier Inn’s focus on the value end of the market means it’s better placed to weather the challenging landscape. News that forward bookings in Britain and Germany are ahead of last year feeds into this viewpoint.

Yet the outlook remains highly uncertain for the reasons I’ve already described. Tough conditions may be prolonged and could scupper the gains it’s hoping to achieve by restructuring its estate. At the same time operating costs remain significant.

Even after today’s fall, Whitbread shares trade on a forward price-to-earnings (P/E) ratio of 14.8 times. That’s higher than the broader FTSE 100‘s reading of around 12.5 times, and one I feel may still not properly reflect the risks it faces.

Long-term investors may want to consider Whitbread shares for the company’s transformation strategy. But I’m personally not tempted to buy the hotelier at current prices.

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I’ve been paying particular attention to stocks that could see a boost during summer. Think budget airlines and hospitality companies that bring in revenue from southern Europe.

Taking to the skies

I already own shares in easyJet but I’ve been eyeing up competitor International Consolidated Airlines (LSE: IAG) for some time. With offices registered in Madrid, the group operates major airlines that serve the south of Spain, like British Airways, Iberia, and Vueling.

During 2024, it brought in £3.56bn in operating profit, up 18.66% from the previous year. Most promisingly, its price-to-earnings (P/E) ratio remains low at only 6.46, suggesting far more room for growth. Adding to this, it reintroduced dividends last year at 9c per share, making for a yield of 2.7%. It also announced a €1bn share buyback programme to support dividends over the next 12 months.

While things are improving financially for the airline, it still has around £14.3bn in debt hanging over from Covid. That’s a fairly large amount for a company with only £6.79bn in cash and equivalents. Another recession or pandemic-like event could send it into serious financial trouble. Promisingly, its equity has increased by over £5bn in the past three years.

Fuel is another key factor to watch — as the company’s largest operating expense, any supply disruptions or price increases could hurt its margins. The company hedges fuel to mitigate this risk but it’s only a partial solution.

Overall, IAG looks to me to be on a solid route towards recovery. Barring the unlikely event of another pandemic-like recession, I think it has great prospects and is worth considering this summer.

Local short stays

With Brexit putting a dampener on EU travel, many Brits are looking closer to home for their holidays. Premier Inn owner Whitbread (LSE: WTB) stands to benefit from this trend. The hotelier is the UK’s largest hotel chain, with a growing footprint in Germany.

Its affordable pricing and widespread locations support resilient demand, making it the supplier of choice for domestic holidaymakers.

However, it does face some challenges. Rising wages and higher national insurance contributions are straining its margins. Plus, there’s a potential oversupply of options in the hotel market due to Airbnb and similar outfits, giving consumers a glut of cheap options. With the economy still in recovery mode, restrictive spending patterns could hurt its profits.

Latest results highlighted £2.92bn in revenue and earnings of £312.1m, resulting in a moderate net profit margin of 10.5%. Its P/E ratio is slightly above average at 19.5, which could limit growth. However, its potential for returns is boosted by a decent 3.54% dividend yield. It reintroduced dividends in 2022 after a Covid-era cut and rapidly increased them from 34.7p per share to 97p.

Whitbread’s financials aren’t as appealing to me as IAG’s but I like the speed at which it reintroduced dividends. That’s a promising sign of its operational efficiency and commitment to shareholders, which makes it a stock worth considering in my books.

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Yet, given the size and timing of the recent move, the index is potentially looking a bit overbought. Therefore, I thought I’d turn to everyone’s favourite AI-bot to see what objective information it would give me for the year ahead.

Getting the green light

ChatGPT thinks there’s a reasonable expectation that the index will surpass 9,000 points this year. It provided a couple of reasons to back this up. The first was analyst expectations. It cited different sources from the internet and reputable investment platforms that forecast growth for the index from the current levels.

The second reason was based around UK economic forecasts. For example, Morningstar analysts anticipate moderate economic growth for the UK this year, with inflation only slightly above target.

The team suggest that revised fiscal policies could provide more flexibility, potentially supporting higher valuations in the stock market. As a result, this could help to fuel a rally above 9,000 points.

Caution required

The problem with ChatGPT is that it’s purely objective. It doesn’t factor in sentiment or the view from the ground, which is why humans still have a significant role to play when it comes to making investment decisions.

For example, the latest inflation figure for January hit 3%, the highest level since last March. I know many people are tightening their belts again when it comes to discretionary spending.

This might not hamper FTSE 100 stocks today, but I think it could impact the index overall later this year. For example, consider Whitbread (LSE:WTB). The consumer discretionary stock’s down 23% over the past year.

The hospitality company owns Premier Inn, with most of the hotels in the UK, but also some exposure in Germany. It makes money from the hotel bookings, food and drink sales and associated add-ons.

I thought it was interesting that in a trading update for the recent Christmas/New Year period, UK accommodation sales were only up 2% versus the previous year. Total group sales actually fell 2% to £763m.

Looking forward, I feel Whitbread could struggle if the UK economy does slow down. Customers might decide to cut back on holidays or choose more budget alternatives. Of course, in my view, the risk is that fears around the UK are misplaced. If we reach summer and sentiment’s booming, the company has the potential to outperform massively.

Bringing it all together

I believe the FTSE 100 will break through 9,000 points shortly. But I think the index could have some form of healthy correction as we move into the summer. This could be driven by some investors banking profits, as well as the potential for a global trade war with US tariffs taking effect. Any slowdown in the UK economy could weigh on the market too. I’d expect consumer discretionary stocks to underperform in this period, so I’ll be staying away from Whitbread right now.

But should we get such a dip, I’d use it as the opportunity to load up on cheap bargains.

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The FTSE has a price-to-earnings (P/E) ratio of around 14.5 times, compared to 27 times for the far pricier S&P 500. Many individual stocks look even cheaper than that.

Just because a stock index is rising doesn’t mean individual constituents are. Take Premier Inn and Beefeater owner Whitbread (LSE: WTB). While the FTSE All-Share’s up 15% over the last year, its shares have slumped 20%.

Can Whitbread shares fight back?

Whitbread looks nicely priced with a P/E of 13.5 times earnings. But is it a value trap? Could be.

Whitbread’s set to take a hit from the Budget, as employer’s National Insurance and Minimum Wage hikes drive up costs across the hospitality sector. Employers will struggle to pass the prices on to customers, as they’re struggling too. That may continue with inflation forecast to hit 3.7% later in the summer, according to the Bank of England.

Whitbread does have a big expansion opportunities in Germany where it’s pushing Premier Inn. There’s a problem though. The German economy’s struggling too.

Long term, Whitbread could be tempting. Its five-year expansion plan targets adjusted pre-tax profit of at least £300m and £2bn in shareholder distributions by 2030. The company also aims to increase its hotel room estate to 98,000 as part of a longer-term strategy to reach 125,000.

The shares have a solid trailing yield of 3.5%. The long-term outlook may appear promising, but I’d expect short-term volatility. Especially since Whitbread’s expansion plans may call for significant capital investment, which may hit profitability and cash flow. I think investors will find better value to consider elsewhere.

B&M European Value Retail is cheaper

At least Whitbread’s still in the FTSE 100. Discount retailer B&M European Value Retail (LSE: BME) has tumbled into the FTSE 250 after a bad run. Its shares plunged 37% over the last 12 months.

Investors fled last June when the board skimped on profit guidance in a full-year 2025 trading statement that Shore Capital slammed as a “very backward looking update”.

They didn’t return even when the company reported on 4 November that group revenues for the six months to 28 September had climbed 4% to £2.64bn. The pace of growth had slowed markedly year-on-year.

Are investors being too sceptical? Possibly. B&M brought some post-Christmas cheer with a special dividend worth £151m in a trading update on 9 January. That followed a strong Q3. Nine-month revenues climbed 3.3% to £4.3bn. Yet the B&M share price continues to flounder.

With a P/E of just 8.5 times, value seekers might like to consider this one. Especially as the cost-of-living crisis drags on and consumers continue to hunt for bargains. B&M generates plenty of cash and is on track to open 73 stores this year. Interested investors should brace themselves for short-term volatility.

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This year, I expect to see plenty more due to the fact that valuations remain low. With that in mind, here are three potential takeover targets.

Smith & Nephew

First up, we have Smith & Nephew (LSE: SN.). It’s a medical technology company that specialises in orthopaedic solutions. This name often comes up in discussions about potential takeovers. And I wouldn’t be surprised to see some interest from another business in 2025.

Currently, the company’s trading on a forward-looking price-to-earnings (P/E) ratio of just 11.6. That low valuation could be attractive to a larger player in the market such as Johnson & Johnson or Stryker or perhaps a company that’s looking to get exposure to this fast-growing area of healthcare.

It’s worth noting that Smith & Nephew’s being held back by issues in China at the moment. This could be off-putting for potential buyers as it’s a risk.

All things considered however, I definitely think there’s a chance it could receive an offer.

Whitbread

Another company that looks cheap and could be of interest to a larger rival is Whitbread (LSE: WTB). It owns the Premier Inn brand.

Currently, the stock’ well off its highs and the P/E ratio using the earnings forecast for the year ending 28 February is only 14.4. That’s a lot lower than the valuations on some other hotel companies (IHG’s on 28), and it could be attractive to a larger player looking for exposure to the budget hotel market.

One downside to this company is that most of its revenue comes from the UK. The fact that it’s not highly diversified geographically could put off some buyers.

At the same time, the UK focus may be appealing to a foreign player. After all, the UK’s a popular tourist destination and Premier Inn’s a well-known brand.

Sage

Finally, I wouldn’t be surprised to see a bid come in for Sage (LSE: SGE), a software company that specialises in accounting and HR solutions.

This stock’s a bit different to the other two in that it’s not beaten up at present. Currently, it’s trading close to its all-time highs.

Yet its market-cap’s still only £12.9bn, which is peanuts in the technology world (rival Intuit has a market-cap of £140bn). So it wouldn’t shock me if a larger tech company was interested in buying it.

In the years ahead, the market for accounting software’s projected to grow by around 9% a year as businesses undergo digital transformation. And Sage is an industry leader.

It’s worth noting that competition‘s rising in this area of technology. So t could be other companies that see takeover activity and not Sage.

This company has an excellent long-term track record however. So I reckon it could be of interest to many businesses.

Worth buying?

I’ll point out that it’s generally not smart to buy a stock just because it could be a takeover target. Often, bids don’t materialise.

But in this case I think all three stocks I’ve highlighted are worth considering today. All have attractive long-term prospects and have been good investments historically.

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A historic FTSE 100 company

Whitbread’s crown jewel is undoubtedly Premier Inn, the UK’s largest hotel brand. With over 800 hotels, Premier Inn has become synonymous with affordable, quality accommodation. But Whitbread’s portfolio doesn’t stop there – it also operates popular restaurant chains like Beefeater and Brewers Fayre.

The past year has been pretty disappointing for investors. The shares have taken a 17.1% tumble over the last year, underperforming industry peers and the FTSE 100.

Reasons for optimism

While others might have battened down the hatches, management has been busy trimming the fat and stoking the fires of innovation. In a tough environment, they hope to increase margins through cost-efficiency hopes, potentially serving up a tasty surprise for the bottom line.

These efforts have already delivered £50m in savings for the 2024 financial year. By optimising its food and beverage offer, and converting 112 lower-returning branded restaurants into new Premier Inn hotel rooms, the firm aims to enhance its proposition for guests, all while increasing efficiencies. For the value-hungry investor, the current price-to-earnings (P/E) ratio of 17.1 times (compared to the industry’s heartier 23.4 times) might be pretty tempting. An average of analysts also forecasts potential growth of 33.9%. Obviously, none of these estimates or forecasts ever guarantee returns, but suggests that plenty are feeling optimistic about the future again. There’s also a fairly generous dividend yield of 3.3% that’s sure to whet the appetite of income-seekers.

However, a discounted cash flow (DCF) suggests the shares are about 7.6% overvalued already, so the numbers don’t exactly make it clear what’s next. I’d also argue that even with a payout ratio of 60%, the future of the dividend is far from clear. Historically, the dividend yield has varied significantly, falling to 1.3% in 2022.

Sector challenges

The decision to exit 126 lower-returning branded restaurants highlights the challenges faced by the company’s food and beverage arm. Management have acknowledged that some of its branded restaurants have struggled to meet targeted levels of return due to reduced footfall from non-hotel guests.

The hospitality sector remains a fickle beast, vulnerable to the whims of economic tides and changing consumer tastes. The planned job cuts, while aimed at improving efficiency, could also pose reputational risks and potential short-term operational challenges.

An uncertain future

I’d suggest Whitbread stands at a crossroads, a 280-year-old titan facing down 21st-century challenges with an unproven new map. Despite plenty of challenges in the sector, the firm’s market-leading position, coupled with its aggressive restructuring plans, offer a tantalising glimpse of potential.

For me, the FTSE 100 company’s journey from 18th-century brewer to 21st-century hospitality powerhouse is far from over, and the next chapter could be its most transformative yet. But with the shares already potentially above an estimate of fair value, I don’t see a huge amount of opportunity. I’ll be passing for now.

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The best share to buy isn’t always the one investors are desperate to add to their portfolios. Often, it’s the one nobody likes. Which brings me to FTSE 100-listed hotel chain and restaurant group Whitbread (LSE: WTB).

The Whitbread share price is down 18.18% over the last 12 months. On Tuesday (20 August), it touched a 52-week low of 2,768p. Investors hate it. I’m already tempted.

The stock has climbed slightly since then to 2,810p but faces a long journey to recover its lost value. I fancy getting in at the start of it.

Whitbread buying opportunity

Whitbread boasts a strong raft of brands, led by Premier Inn, which operates both in the UK and Germany. It also owns Beefeater and Brewers Fayre, and several lesser-known names including Cookhouse and Pub. 

The hotels industry is highly cyclical and Whitbread’s chains are mass market rather than high-end. That left it exposed during the cost-of-living crisis.

Yet I’ve just been poring over 2024’s results, and they don’t look bad at all. Group statutory revenues rose 13% to £2.96bn, “driven by strong growth in the UK and progress in Germany”. Adjusted profit before tax jumped 36% to £561m. Earnings per share rose 27%. Group return on capital jumped from 10.5% to 13.1%.

Whitbread nonetheless ended the year with net debt of £278m, a reversal of its 2023 net cash position of £173m. The group’s debt-to-equity ratio has climbed to a slightly worrying 1.45, as this chart shows.

Chart by TradingView

Yet the board still felt able to return a whopping £756m to shareholders in 2024, via dividends and share buybacks. That’s up from £119m in 2023. I’m surprised investors aren’t more grateful.

Top UK value stock

Whitbread started 2025 with a 26% hike in the final dividend per share to 62.9p and a further £150m share buyback for the first half. Its trailing yield is just 2.44%, but it’s forecast to hit 3.53% in 2025 and 3.9% in 2026. That’s more like it.

I think Whitbread has been oversold and the 18 analysts offering 12 month price targets seem to share my view, setting a median target price of 4,050p. That’s up 44% from today’s price.

The UK economy is picking up, even if Germany is still in the doldrums. The board remains upbeat about its full-year outlook and plans to add another 3,500 rooms across the UK, which should boost revenues.

Whitbread isn’t quite as cheap as I expected after its bad run, trading at 13.55 trailing earnings. That’s still below the FTSE 100 average of 15.4 times, though. The sector remains cyclical and if the UK recovery proves a false dawn, the firm could be in for another tough year. German GDP has flatlined and it could prove a drag.

Yet Whitbread is in a much better stronger position than I expected. I think there’s a real opportunity here, and I’m going to add it to my Stocks and Shares ISA this month.

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