Why you may regret not buying turnaround stock Whitbread plc today

These are tough times for the UK high street and that spells tough times for Costa Coffee owner Whitbread(LSE: WTB), which published its third-quarter trading update today.

Inn trouble

Its share price has ground down lately but is up a perky 2.26% this morning, after it reported third quarter total group sales growth of 5.6%, and confirmed it is on track to meet full-year expectations.

Costa sales rose 7.2% and Premier Inn rose 5% as it invested in new hotels and extensions, but these figures mask a disappointing like-for-like growth, with sales down 0.1% at Costa. Sales were flat in its hotels division, rose just 0.5% at Premier Inn and 1.8% in restaurants.

Battle of Brittain

CEO Alison Brittain said Costa high street stores remain highly profitable, but weak retail market footfall is hitting like-for-like performance and she expects this to continue "for some time". Costa has 425 stores in China and is continuing its good momentum with 2.1% sales growth rising to 4.2% for revenues.

The £7.2bn FTSE 100 company trades at a forecast 14.2 times earnings but EPS prospects remain positive, with a predicted rise of 4% in the year to 28 February, followed by 6% and then an even more stirring 8%. Whitbread's forecast yield is just 2.8% but it has a progressive dividend history stretching back 10 years, so we can expect further growth, especially since it also has solid cover of 2.5. Its looks well positioned to survive tough times to come.

Royal resurgence

Former state postal monopoly Royal Mail (LSE: RMG) has been marked 'return to sender' in recent months after suffering a rash of broker downgrades, amid concerns over worsening letter revenue trends, rising labour costs and its massive pension overhang.

Its trading update for the nine months to 24 December saw CEO Moya Greene hailing "a good performance over the important Christmas period". Parcel volumes rose 6%, with 149m parcels handled over the December trading period, while revenues grew 4%. Parcelforce Worldwide volumes were up 2%, benefitting from new customer wins.

Easy being Greene

Everybody knows letters volumes will fall but the drop was lower than expected, at 5%, with revenues down 3%, Greene said. GLS, its smaller overseas business, delivered another strong performance with both volumes and revenue rising 10%. Growth was strong in Italy, with Denmark and Eastern Europe also performing well. Overall group revenue was up 2%.

The £4.65bn company, which recently dropped out of the FTSE 100, expects these trends to continue, with full-year underlying revenue growth broadly in line with the first half. Its cost avoidance programme should deliver around £190m, with net cash investment of around £450m for the full year.

Mail and stale

Royal Mail's share price has rebounded 20% in the last three months but markets cooled today, with the stock currently down 1.66% this morning at 460.6p. Despite recent share price growth, it trades at a tempting forecast price/earnings valuation of 11.5 times.

Management still faces a gargantuan task turning this beast around, with earnings per share (EPS) forecast to fall 11% in the year to 31 March 2018 and returns of 0% and -1% for the subsequent two years. There is always the dividend, a forecast yield of 5.4%, covered 1.6 times. As I have said before, Royal Mail can still deliver for the long run.

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Harvey Jones 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.

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