Whitbread (LSE: WTB) and Smiths Group (LSE: SMIN) are two blue-chip stocks that have fallen more heavily than the FTSE 100 in the October sell-off. As I’m writing, the index is down a bit over 6%, while Whitbread and Smiths have fallen around 8% and 10%, respectively. I thought these two stocks were good value before the sell-off, so I’d be more than happy to buy them at their current discount prices.
Costa bravo
Back in midsummer, when Whitbread’s shares were trading at 3,893p (valuing the group at £7.15bn), I reckoned a fair sum-of-the-parts valuation was 5,200p (£9.55bn). Management had made a commitment to demerge Costa Coffee and I liked the long-term outlook for both Costa and Whitbread’s other business, Premier Inn. I also reckoned there was a fair chance of a value-outing takeover bid coming in for Costa before the demerger.
At the end of August, Whitbread announced an agreement to sell Costa to The Coca-Cola Company for £3.9bn. The shares leapt 14% on the day and went on to reach a high of 4,728p, before retreating to their current level of 4,346p. I’m still confident Whitbread’s shares deserve to trade comfortably above 5,000p — and that they will do so in due course.
Premier growth
The sale of Costa is expected to complete in the first half of 2019, with Coca-Cola needing to obtain regulatory approval in the EU and China. This shouldn’t be a problem and Whitbread is expecting net cash proceeds of £3.8bn from the sale, after transaction costs and separation costs. This will give the company considerable firepower to continue growing Premier Inn’s core UK business and to expand at scale internationally.
Given the size of the growth opportunity I see here, I view a current-year forecast price-to-earnings (P/E) ratio of 17.5, and running dividend yield of 2.3%, as offering excellent long-term value. And I wouldn’t rule out a bid for Premier Inn in the short term either.
Evolution or revolution
Industrial conglomerate Smiths is another company with value-outing break-up potential. Indeed, with five operating divisions and multiple businesses serving all manner of markets, the potential is considerable.
The current management team has focused on evolution rather than revolution but is evidently not averse to more radical restructuring. US firm ICU Medical tabled an offer for Smiths’ medical division earlier this year. The board ultimately rejected it, but the valuation put on just this one division by ICU — between £2.5bn and £2.8bn, according to Sky News — hints at the value that could be unlocked by a break-up or partial break-up of the conglomerate. The stock market is valuing the whole Smiths group at £5.4bn (at a current share price of 1,361p), and I’m confident this is well below the sum of the parts.
The company currently trades on a forecast P/E of 13.9 and running dividend yield of 3.3%. I view this as an attractive valuation for the evolving business but would hope to see an acceleration in the outing of value by more radical restructuring. On this front, I take a positive view of Smiths’ announcement last week that it’s appointed Goldman Sachs –which had advised it in its discussions with ICU — as joint corporate broker.