I reckon it’s a good idea to run your winners when investing. And that can be decent advice when it comes to running businesses too.
Whitbread (LSE: WTB) had a fast-growing operation in its Costa coffee brand that scored higher profit margins than the rest of the hotel and hospitality set-up in the enterprise. But instead of hanging on to it and building it up, the firm sold Costa to The Coca-Cola Company in January 2019 for £3.9bn, which strikes me as selling that winner rather than running it.
Shareholder benefits?
Whitbread said at the time, combining Costa with Coca-Cola’s “global scale, product and distribution capabilities” would “ensure new product development, continued growth in the UK and more rapid expansion overseas.” What a pity, then, that Whitbread and its shareholders will no longer benefit from any of that growth!
But Whitbread did say the sale of Costa would provide benefits for “our teams, pensioners, suppliers, shareholders and other stakeholders.” So, it’s interesting to read today’s half-year results report, which describes where some of that one-off payment of £3.9m has gone.
And the company bunged £2.5bn of it at buying back some of its own shares. I reckon it could have spent the money in better ways. Who’s to say, for example, the timing of the share purchases was good?
Whitbread is a highly cyclical business and there’s a fair chance the shares are trading near to the top of their cycle. Profits have been strong in the hotel business for some time, and the thing about cyclical businesses is that earnings and share prices cycle up and down, with downs usually following ups!
One good principle in business is to buy assets when they show good value, such as when the seller is distressed. I fear Whitbread’s share price could be set to extend its current downward trajectory and a much better opportunity for buying back shares could arrive later. Indeed, the outlook statements are getting stronger in their negativity.
An uncertain outlook
Today’s report talks about challenging conditions and uncertainty in the near term. But the company has “confidence in the long-term structural opportunities available in the domestic budget travel markets in the UK and Germany.” However, statements like that make the cynic in me wary about the outlook in the short and medium terms.
Meanwhile, Whitbread is charging ahead with an acquisition and expansion programme in Germany. But is this the right time to be expanding like that? Again, maybe it would be better to wait for better prices later.
And getting back to where the Costa money went, after paying £381m to the Whitbread Group pension fund it now has a surplus of £222m. That’s good.
There’s also net cash of around £804m on the balance sheet, which compares to zero cash a year earlier, before the sale. But on borrowings, the news is lacklustre with the figure at around £882m, compared to £961m a year earlier.
And what if there’s a great turndown in the hotel industry around the corner? I reckon Whitbread could end up wishing it had held onto that £2.5bn it potentially squandered on buying back its own shares. I’ve changed my mind and cooled on Whitbread and will avoid the stock for the time being.