The FTSE 100 market crash produced some bargains. Is the Whitbread share price one of them?

I am not convinced that Whitbread will outperform the FTSE 100, even with its share price sitting just above their market crash lows

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

FTSE 100 member Whitbread (LSE:WTB) was keen to remind investors that it was in good financial health when it delivered its results for the year ended 27 February yesterday. Whitbread started its new financial year with £503m in cash and a revolving credit facility of £950m. Dividends have been cut to keep cash in the business.

It is also an eligible issuer under the UK Government’s Corporate Financing facility. This is a new badge of honour that businesses are keen to tout. What it means is that Whitbread is in good enough financial shape to issue debt backed by HM Treasury.

So, Whitbread should survive the coronavirus crisis and plans to gobble up market share by taking advantage of the battered hotel industry when the dust settles. To this end, Whitbread is seeking to raise a £980m (after fees) by creating and selling new shares. That may not have been necessary had some £2bn not been spent on share buybacks over the last couple of years.

Whitbread was flush with cash after selling Costa Coffee to Coca-Cola for £3.9bn in 2018. Activist investors had been hankering for this to happen. Costa was deemed to be worth more in cash than as part of Whitbread. Shareholders approved the move and had the price of their shares supported by the buybacks.

In need of a pick-me-up

But the sale of Costa exposed an issue. Whitbread’s revenues grew at an average of 9% per annum from 2015 to 2017. In 2018, without those coffee sales, revenue fell to £2.01bn from £3.1bn the year before. Sales revenue grew at just 1.24% on average per year from 2018 to 2020. Without those coffee sales, Whitbread’s revenue growth could not even match UK GDP growth. Although Whitbread’s London hotels were doing okay, regional demand was sagging, with the blame placed on a lack of business confidence around Brexit. Something had to change to drive revenue growth.

A good chunk of the Costa sale money was earmarked for expansion into Germany. The German hotel market is highly fragmented, with many independent and small hotels. This seemed the perfect stomping ground for a hotel chain to scoop up market share. 

Unfortunately, the coronavirus crisis has hampered any spending plans, and it’s hard to say for sure how long the crisis will last. Hotels are open in Germany again, but remain closed in the UK, probably until September. A new wave of infections may shut them again.

At present, Whitbread is burning through £80m in cash each month. Planned expenditures amount to £600m over the next six months. How much of that £980m will be available to take advantage of cheap investment opportunities? Much of it looks destined to support existing plans and keep the business alive. This could mean another rights issue should those cheap investment opportunities present themselves in force.

Is Whitbread a bargain?

Whitebread operates in the budget hotel sector, which should benefit from the looming recession. Tourism and leisure travel will pick up again; of this, I am sure. But bosses will have noticed that meetings done digitally cost a lot less than putting staff on the road. The anticipated growth from expansion into Germany might not be as robust as forecast, and taking investment opportunities might rely on issuing even more shares. I don’t think Whitbread’s share price will outperform the FTSE 100.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James J. McCombie has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »