Whitbread’s (LSE: WTB) decision to sell off its breweries and pub estate in 2001 and instead focus on its hotel and restaurants business was a masterstroke. Not only has it avoided the gradual decline in the pub business that has hurt a number of its former competitors in recent years, it has also enabled Whitbread to tap into the growth of café culture in the UK, as well as the increasing popularity of budget hotels since the credit crunch.
Now though, Whitbread faces a major challenge to its excellent business model. The living wage may be a good thing for those who currently earn minimum wage, but for Whitbread it will mean higher costs over the coming years. And with the company set to pass those higher costs on to consumers in the form of higher prices, its sales and profitability outlooks are relatively uncertain. As such, and while Whitbread’s price-to-earnings growth (PEG) ratio of 1.5 has considerable appeal, it may be prudent to watch rather than buy it at the present time.
Acquisition strategy
Also facing an uncertain future is pharmaceutical giant AstraZeneca (LSE: AZN). Its profitability continues to be hurt by the loss of patents on key drugs and this is showing little sign of easing, with the company’s bottom line due to fall by a further 10% in the current year. This puts it on a forward price-to-earnings (P/E) ratio of 16, which indicates considerable upside over the medium term.
The potential catalyst for capital gains is AstraZeneca’s acquisition strategy and improving drugs pipeline. With it having a very sound balance sheet and reliable cash flow, it has the potential to turn its fortunes around through the purchase of other, smaller companies to enhance its own future growth prospects. Allied to this long-term growth potential is a relatively defensive profile, which means that AstraZeneca could prove to be a relatively strong performer in the current uncertain economic environment.
Long-term potential
Meanwhile, Legal & General (LSE: LGEN) continues to be one of the most appealing income stocks on offer in the FTSE 350. It yields 6.6% and with dividends being covered 1.4 times by profit, there’s plenty of scope for further rises in dividends over the medium term. Furthermore, with Legal & General expected to increase its bottom line by 7% this year, it’s due to increase shareholder payouts by 6.7% in 2016.
With Legal & General trading on a P/E ratio of 10.7, it seems to offer huge upside potential. It has an excellent track record of earnings growth, with its bottom line having risen in each of the last four years. And while there are doubts surrounding the company’s bond portfolio and the potential for defaults in the coming years, Legal & General’s valuation appears to take this risk into account, thereby making it a strong buy for the long haul.