Should I Buy Whitbread plc?

Hotel and restaurant company Whitbread (LSE: WTB) really caught my eye in March. “It isn’t cheap,” I wrote, “but its strong financial position, big brands, mainstream target market, Asia growth targets and robust management give it plenty of depth and body.” I declared it a buy then. Was I right? And would I order more of the same today?

Happily, my judgement was spot-on. Whitbread is up 47% over the past 12 months, against growth of just 11% on the FTSE 100. Over five years, it is up 366%. Beat that! I still think of Whitbread as a brewer, but it’s caffeine that counts these days, thanks to the success of its chain of Costa Coffee shops. Not to forget heads on beds, courtesy of Premier Inn. 

Premier stock

Whitbread’s last set of results showed Costa‘s underlying profit up 20.5% to 43.5 million in just six months, while total sales at Premier Inn rose 12.2%. That helped power a 12.7% rise in total revenues to £1.45 billion. Both chains continue to expand. There are now 2,680 Costa Coffee shops worldwide, and more than 53,000 Premier Inn rooms, with another 12,000 to come by 2016. Sleep on that!

Whitbread does face some threats, although each one masks an opportunity. Its net pension deficit is still £507 million (but that’s down from £640 million in mid-2012). The UK could be saturated with Costa Coffee (who cares when it only has 246 stores in China?). Rival Starbucks is looking to recapture lost ground (but can’t keep its tax affairs out of the headlines). Revenue per available room (RevPAR) at Premier Inn grew just 0.8% (but still beat the wider market).

It’ll Cost’ya

My biggest concern, inevitably, is whether Whitbread can maintain its recent pace of growth. It is only two years into an aggressive five-year expansion plan, which includes a target of 3,500 Costas worldwide, suggesting there is more fun to come. The problem is that you have pay a premium price of 25 times earnings. In return you get a yield of just 1.6%, although management policy is progressive, with a recent 11.8% rise in the interim dividend to 21.80p a share. Earnings per share are expected to grow an impressive 19% in 2014, followed by another 12% in 2015. Whitbread is still strong stuff, but new investors have left it late to wake up and smell the coffee.