Could FTSE 100 stock Whitbread rise to 5,200p?

A colourful firework display
A colourful firework display

The Whitbread (LSE: WTB) share price stood at 3,893p at the end of trading yesterday, down 2.7% since the start of the year compared with a 1.9% decline for the FTSE 100. However, I believe the owner of Costa Coffee and Premier Inn could go on to trounce the index by the end of the year, with a potential 30% rise in its shares to 5,200p.

The company released its Q1 results today and the shares are up 2.7% to near the 4,000p level at which they started the year. Let's have a look at the results before returning to that 5,200p valuation.

In-line with expectations

On the face of it, some of today's numbers were disappointing. Costa's like-for-like sales were down 2% and Premier's were down 0.9%, giving the group an overall decline of 1.9% in like-for-like sales. However, this was no worse than analysts were expecting, reflecting well-known recent trends in the UK hotels market and retail footfall weakness in traditional shopping locations.

More positively, Costa's total sales growth was 4.9%, due to a strong contribution from new stores and Express machines, and Premier's was 2.2%, driven by additional capacity. Overall sales growth was 3.2%. The company reported good progress on its £250m efficiency savings and chief executive Alison Brittain said: "We expect to deliver in line with expectations for the full year."

Consensus forecasts

City analysts expect Whitbread to deliver a £610m pre-tax profit on revenue of £3.5bn for its financial year to February 2019. The consensus forecast for earnings per share (EPS) is a 2.3% rise to 266p, while the dividend is expected to be increased 4% to 105p.

At the current share price, the forward price-to-earnings (P/E) ratio is 15 and the prospective dividend yield is 2.6%. The P/E doesn't appear to offer great value given the low-single-digit EPS growth, while there are plenty of far higher dividend yields available among the company's FTSE 100 peers. So what's that potential 30% upside to 5,200p I mentioned earlier all about?

Demerger of Costa

Many analysts have been saying for years that there are no synergies from keeping Premier and Costa together and that the two management teams should thrive as separate entities.

There are no synergies from keeping the businesses together and the two management teams should thrive as separate entities. Whitbread finally succumbed to pressure from activist investors. It announced in April that it is "committed to a demerger of Costa, ... expected to be completed within 24 months." The company said today that good progress is being made on the core infrastructure and efficiency work in preparation for the demerger.

A win either way?

Analysts at Canaccord said in April:"We remain buyers with a 4,500p target price. Our analysis suggests a potential break-up price of 5,200p." I'd go along with that valuation. Furthermore, there's a fair chance value could be outed sooner rather than later by a bid for Costa before the demerger.

However, I rate Whitbread stock a 'buy' not only because of the value-outing potential of a disposal of Costa, but also because of the medium-term prospects of Costa and Premier, if we get to a demerger. In the case of the former, I see great potential in Costa China and Costa Express and, in the case of the latter, in the rollout of Premier Inn Germany.

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G A Chester 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.