2 beaten-up FTSE 100 stocks: is now the time to buy?

Whitbread costa coffee machine

Buying high-quality stocks when they're out of favour is an investment strategy that can generate powerful returns over the long term. With that in mind, today I'm looking at two FTSE 100 companies that have seen their share prices decline significantly in recent years. Is now the time to jump on board?

Whitbread

A few years ago, Whitbread(LSE: WTB) shares were in hot demand. A near 50% rise in sales in just three years saw shares in the owner of Costa Coffee and Premier Inn shoot up from around 1,500p to almost 5,500p between 2012 and early 2015. However, since then, the stock has pulled back significantly, and today, can be bought for under 3,800p. Why the drop? 

In recent years, investors have been concerned that the company's best growth is behind it. Brexit uncertainty has also spooked the market. Do those concerns have merit? Let's take a look at today's half-year results for a clue.

Whitbread's interim results released this morning look robust, in my view. For the half year to 31 August, revenue increased a healthy 7.4% to £1,671m and profit before tax climbed 6.7%. The company registered a 7.4% increase in underlying basic earnings per share to 143.7p, and declared a dividend hike of 5%. During the half year, over 2,000 new Premier Inn rooms were opened in the UK. Chief Executive Alison Brittain, commented: "Although we remain cautious on the current environment, we are confident that ongoing disciplined allocation of capital and focus on executing our plans will deliver long-term growth in earnings and dividends and a strong return on capital."

The market is clearly unimpressed with these numbers, and the stock is down almost 5% as I write. However, for long-term investors, I believe the current valuation is attractive. Whitbread's forward P/E now stands at 14.8, which looks reasonable for a company forecast to generate sales growth of 8% and 7% this year and next. A prospective dividend yield of 2.6% is also on offer. For investors looking for a stock that could offer both long-term capital growth and dividends, Whitbread has potential, in my view.

Shire

Shares in biotech specialist Shire(LSE: SHP) have followed a similar pattern to that of Whitbread in recent years. Between mid-2013 and mid-2015, Shire shares leapt from 2,000p to 5,700p, but since then, they've pulled back considerably to 3,670p. Does the stock now offer value?

An investigation into Shire's share price weakness reveals two main concerns. First, it appears that with generic competitors looking to capture market share, the market is concerned about growth potential going forward. Second, after the $32bn acquisition of Baxalta, the company's debt levels have increased significantly. Total long-term debt on the balance sheet surged from $82m in 2015 to $20bn in 2016. That clearly adds an element of risk to the investment thesis.

On a forward P/E ratio of just 9.7, Shire shares certainly look cheap, although with the high debt levels and a dividend yield of just 0.7%, I'll admit that I'm not blown away by the investment case for the pharmaceutical stock. 

Five better FTSE 100 stocks? 

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended Shire. 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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