Should I Buy Whitbread Plc?

The Motley Fool

It's time to go shopping for shares again, but where to start? There are loads of great stocks to choose from, and I've got my wallet out. So should I order Whitbread (LSE: WTB) (NASDAQOTH: WTBCY.US)?

Ale and hearty

For me, Whitbread will always be an old English ale, but this FTSE 100 giant is so much more than a brewer these days. It is the UK's largest hotel and restaurant company, with a tasty spread of brands including Premier Inn, Beefeater, Brewers Fayre, Table Table and the ubiquitous Costa Coffee chain. Should I buy it?

Where's the beef?

Leisure company stocks should have been the big losers of the financial crisis. Eating and drinking out, weekend breaks away, these are some of the first things to go when consumers are feeling the pinch. That makes Whitbread's share price performance of the past five years all the more impressive. It is up 116% in that time, and more than 50% over the past 12 months, against 18% and 7% respectively for the FTSE 100 as a whole. Clearly, people can still afford the budget-priced treat of a coffee at Costa, a table at Table Table and, um, some beef at Beefeater.

Leisure wears

Its recent fourth-quarter trading statement looks pretty tasty, although the market honed in chief executive Andy Harrison's admission that headline like-for like sales growth of 2.7% in the 11 weeks to 14 February "was slightly suppressed by adverse weather conditions in January, particularly affecting the restaurants business". With total sales growth up 16.9%, investors won't be too worried about that. Whitbread still served up "outstanding" organic growth, Harrison said, winning a larger share of a flat consumer market, with sales up a frothy 14.8%, and record "guest satisfaction" scores (so they do pay attention to those forms!). Over 50 weeks, like-for-like sales were up 3.7%. This left Whitbread on course to deliver full-year results in line with expectations.

Management has bullish growth targets, with plans to increase the number of Premier Inn UK rooms to at least 65,000, add up to 100 new restaurants, and double Costa's size to 3,500 stores worldwide. Sales in Costa Asia grew 72% to nearly £46 billion, as yet another FTSE 100 company looks to expand eastwards. Whitbread can't keep growing at this rate forever, of course, but for now, there is little sign of a slowdown. Analysts like it. UBS has just upgraded the group to a 'buy', citing its success in tripling the number of Premier Inn rooms in nine years and Costa stores in six years, despite the 2008-09 downturn.

Whitbread wisdom

I'm disappointed at Whitbread's 2.26% dividend, which is well off the FTSE 100 average of 3.3%. Covered 2.5 times, however, there is scope for growth. Its 19.4% operating margin, however, is impressive, and I'm happy with its 10% projected earnings per share (EPS) growth for the next 12 months. It is looking pricey, trading at 20.5 times earnings. That's what happens when your share price doubles in five years. Trading on a PEG of 1.5, Whitbread may struggle to repeat past growth successes. As with many FTSE 100 companies, the recent bull market has left fewer bargains out there. Whitbread isn't cheap, and its customers' pockets are under pressure, but its strong financial position, easy brand recognition, mainstream target market, Asia growth targets and robust management give it plenty of depth and body.

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