The recent performance of the FTSE 100 has been relatively disappointing. While it may not have been a stock market ‘crash’, it appears to have experienced a ‘correction’, which meant that it was trading as much as 11% below its all-time high.
During such situations, it can be difficult to know whether to buy or sell shares. The reality, though, is that the stock market has always recovered from challenging periods, and so market corrections could be a good time to buy shares, such as Whitbread (LSE: WTB).
The hospitality giant appears to have strong growth potential, having the opportunity to outperform a sector peer that released a trading update on Friday.
The company in question is Millennium & Copthorne(LSE: MLC). The hotel operator’s third quarter showed that it has experienced mixed trading conditions, although like-for-like (LFL) revenue per available room (RevPAR) increased by 1.5% in the first nine months of the year. At constant currency, hotel revenue for the first three quarters of the year was flat.
The company faced challenging trading conditions, with them impacting on the wider hospitality industry. There have been pressures such as rising minimum wage requirements, technological disruption and industry consolidation. Alongside geopolitical risks, they are having a negative impact on the company’s performance. Furthermore, the business is still without a permanent CEO, although it did reappoint its interim CEO on Friday.
Looking ahead, Millennium & Copthorne is expected to post a fall in earnings of 17% this year. This suggests that its share price performance could deteriorate – especially since it trades on a relatively generous price-to-earnings (P/E) ratio of around 16.
In contrast, Whitbread has the potential to deliver improving financial performance. Its position in the UK budget hospitality sector remains strong, and it could benefit from weak consumer confidence. As was the case following the financial crisis, consumers may become increasingly price-conscious as the Brexit process continues. This may lead to them trading down to cheaper options such as the company’s Premier Inn brand.
The sale of Costa means that the business will be focused on its hotel chain. Alongside the potential for expansion in the UK, the company may also be able to offer international growth. It already has a foothold in Germany, where it believes it has the opportunity to become a major player in what is a relatively fragmented industry. And with its business model seemingly sound, the stock may be able to diversify its geographic exposure yet further in future years.
While Whitbread trades on a P/E ratio of 17.2, the company is expected to post positive earnings growth in each of the next two years. It also has a sound long-term growth outlook which could mean that it’s able to deliver share price increases over the long term. As such, now could be the right time to buy it, despite fears surrounding the near-term outlook for the FTSE 100.
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Peter Stephens owns shares of Whitbread. 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.