October isn’t the busiest month for company results.
Most companies’ financial years match the calendar year, and their first-half results have been and gone.
However, a couple of FTSE 100 firms with more unusual financial periods are scheduled to report in October.
Both companies are market leaders in their sectors. And both have yet to see their shares recover to their pre-pandemic levels.
For me, this makes them doubly interesting as potential investments.
Dominance
Supermarket Tesco (LSE: TSCO) is the giant of its sector. To put its dominance into perspective, it generated £66bn in revenue and made a net profit of £744m in its last reported financial year.
This compares with number two rival Sainsbury’s (£31bn and £207m), and leading discounter Aldi (£14bn and £5m).
Much is made of the success of Aldi and fellow budget chain Lidl. However, while their continuing expansion represents a threat to rivals, Tesco has adapted well to their rise. It’s consistently maintained its market share at 27%-28% over the last five years.
Free cash flow
In a first-quarter trading update in June, Tesco said it expects to deliver full-year retail operating profit at the same level as last year, and free cash flow within its target range of £1.4bn to £1.8bn.
Free cash flow is the cash left over after all essential costs (from wages to tax), including maintenance capital expenditure. The latter is the expenditure needed to maintain its position in the market.
Free cash flow enables discretionary spending. For example, investment for growth, dividend payments to shareholders, and share buybacks.
Share buybacks and dividends
Tesco has been buying back its own shares this year. The effect of this is to continue giving shareholders ownership of an increasing slice of the business.
The company also uses its free cash flow to pay dividends. It aims to progressively increase the dividend (although this can never be guaranteed).
In the upcoming results, scheduled for next Wednesday (4 October), I’ll be looking for the company’s full-year free cash flow guidance to be on track.
At the checkout
The market’s currently pricing Tesco at around 12 times forecast earnings, with a prospective dividend yield in the region of 4%.
The company doesn’t have the highest growth prospects among FTSE 100 businesses. Nor are the shares super-cheap, in my opinion. However, I do think they offer decent value for this dominant force in UK grocery retailing.
Another market leader
Hotels chain Premier Inn, which is owned by Whitbread (LSE: WTB), is another dominant player in its market sector.
It’s the comfortable leader in the UK midscale and economy segment. But also knocks spots off hotel chains across the board, according to YouGov’s BrandIndex Quality & Value scores.
Home and abroad
Premier Inn still has significant growth prospects in the UK and Ireland. Whitbread sees potential to increase the chain’s current 84,000 rooms to 125,000.
But what particularly excites me is the company’s expansion into the bigger market of Germany. Management believes it can replicate its UK success there, and sees a clear pathway to becoming the largest hotel chain in that country too.
Encouraging progress
International expansion always comes with risk, and it’s possible growth and/or return on investment in Germany may not live up to management’s expectations. However, in a first-quarter trading update, issued in June, the company reported encouraging progress.
It said it now has 56 hotels with 10,000 rooms open. Furthermore, with its early cohort of hotels maturing, management expects its operations in Germany to reach break-even during calendar year 2024.
In the upcoming results (18 October), I’ll be looking for confirmation this is on track, as well as a continuation of the strong trading momentum across the group that Whitbread reported in June.
Valuation
Like Tesco, the company generates substantial free cash flow, pays dividends and is in the midst of a share buyback programme. The market is currently pricing this stock at around 19 times forecast earnings, with a prospective dividend yield in the region of 2.5%.
This may be a pricier valuation than Tesco, but I think it’s a price worth paying. Premier Inn not only has a dominant position and healthy growth prospects in the UK, but also that long growth runway in Germany, and potentially beyond.
Bonus
Finally, if you’re a Whitbread shareholder or potential investor, you may not know that the company offers perks for any holder of 64 or more shares.
Head over to www.whitbread.co.uk/investors/shareholder-centre/benefits/ to check out what’s on offer, and how to apply. The perks in themselves aren’t a reason to invest, but every little helps — as Tesco might say.
