Associated British Foods (LSE: ABF) and Whitbread (LSE: WTB) are two of the FTSE 100’s best performing shares since the financial crisis.
Indeed, since the beginning of 2009 shares in Whitbread have gained 410% excluding dividends, while shares in ABF have added 305% excluding dividends. Over the same period, the FTSE 100 has gained only 70% excluding dividends.
However, despite the impressive returns achieved by both of these companies over the past eight-and-a-half years, it could be time for investors to consider selling up and moving on to more attractive opportunities elsewhere.
Expensive growth
For the financial year ending 30 September, City analysts are expecting ABF to report a pre-tax profit of £1.3bn and earnings per share of 122p.
Based on these figures shares in the Primark owner are trading a forward P/E multiple of 24.1, which looks expensive. Year-on-year the company’s earnings per share are expected to grow by 15% for this fiscal year and then by 9% for the year after. A mid-teens earnings multiple would be more suitable for this moderate growth rate.
Its growth over the past few years has mainly been fuelled by the expansion of the off-price retail brand Primark. While the chain’s growth has helped the overall group power ahead in recent years, analysts widely believe consumers are set to rein-in spending over the next year as rising inflation puts pressure on spending. This trend might slow down Primark’s growth story.
A high earnings multiple does not leave much room for manoeuvre if the company fails to hit City targets for growth. What’s more, the dividend yield leaves a lot to be desired. At the time of writing the shares support a yield of just 1.2%. Still, there’s plenty of room for payout growth with the dividend covered almost three times by earnings per share, although analysts do not see a hike on the horizon any time soon.
Coffee shop saturation
Like ABF, Whitbread also looks expensive compared to the company’s projected growth rate. Over the past five years, its growth has exploded as the company has aggressively rolled out its Costa coffee brand and revamped its hotels business Premier Inn. But growth is now slowing thanks to a number of factors.
The firm’s results for the 52 weeks to 2 March showed overall group revenue rising 8.2% to £3.1bn but most of this growth came from international expansion. Like-for-like sales growth at Premier Inn was 1.5%, down from 4.2% in the year-ago period, and Costa like-for-like growth was 2%, down from 2.9%. The group’s restaurant business saw sales decline 0.3% on a like-for -like basis.
For the fiscal year ending February 2018, City analysts are expecting Whitbread to report earnings per share growth of 4%, a disappointing figure considering that for the last five years the company has reported an average annual income growth rate of around 14.4%. Nonetheless, even though growth is slowing and competition is intensifying, the shares trade at a forward P/E of 16.5 and yield 2.4%.
It might not be worth paying such a substantial premium for a company that looks like it’s best growth days are behind it.
