Many analysts are losing confidence in Whitbread (WTB) yet the leisure giant continues to produce very good numbers, taking the share price beyond £30 for the first time. A solid 3.1% rise in like-for-like first quarter sales has excited investors but not persuaded the City gurus to make big changes to their numbers. So why is there such a difference between what is being said by the market and the analysts?

Investec has been bearish for some time, saying the shares are 'well ahead' of fair value. Its discounted cash flow model has thrown up a £20 price target, implying significant downside to the share price. Today it leaves forecasts unchanged but warns that its estimates for the year to February 2014 estimates 'don't look an east meet' based on the first three months' growth in Whitbread's new financial year. Investec is looking for £405.2 million pre-tax profit versus £356.5 million achieved in the past financial year.

Central to Investec's negative stance is valuation, yet it also bemoans an 'unattractive' free cash flow yield of 5.7% and low dividend yield of 2.2%. As we discussed earlier this month in Shares, many leisure sector constituents pay 4% to 5% yields because of the cash generative nature of the industry.


WTB - Comparison Line Chart (Rebased to first)

Panmure Gordon has raised its target price from £25 to £26.88 but this still remains below the current share price. Its forecasts are below consensus because it has a cautious view on UK hotel trading.

Whitbread is currently valued at £5.2 billion. In April, Charles Stanley analyst Sam Hart highlighted £3.5 billion of freehold property on the balance sheet. Today he expresses a cautious view on the hotels division because of the subdued UK economic environment. Yet he believes tough times could encourage business and leisure travellers to trade down to the Premier Inn brand. We reckon this trend has already happened and note the renewed strength of rival Travelodge following earlier financial problems – and the threat of Ikea launching its budget hotels business in the UK.

Hart reckons Whitbread's valuation 'looks up with events for now' but sees potential for further earnings upgrades on top of the small upward adjustment to his numbers today.




Today's trading update shows that Premier Inn is still beating the market. Its average price per available room (known in the hotels trade as 'RevPAR') fell by 1.8%, yet prices achieved by the broader market declined by more twice this level at 3.8%. The analyst has raised February 2014 earnings per share (EPS) forecasts by 2.4% to 165.5p. Consensus on the eve of the first quarter results was 161p EPS.

The star performer in today's update is, as always, Costa Coffee whose like-for-like sales increased by 8% in the 13-week period. It benefited from cold weather, sending consumers into shops for a hot drink.

Spinning off Costa into a standalone business has long been discussed by Whitbread yet the message from the company has regularly been the need to first build up the international presence.




The issue for investors to consider now is whether Whitbread can sustain its present growth levels. If it can then a price to earnings ratio of 18.6 times forecast earnings (for the year to February 2014) arguably doesn't look too demanding for a company that has significant brand strength and pricing power.

The risk for stocks on such high valuations is that the first blip in sales growth can equate to a sharp correction in the share price. Whitbread has delivered the goods for some time yet we cannot get complacent about this track record being sustained forever.

Issue Date: 18 Jun 2013