2014 has been another strong year for Whitbread (LSE: WTB), with shares in the hotel and coffee chain operator gaining 17% since the turn of the year. This is well ahead of the FTSE 100’s 1% rise over the same time period. However, there could be much more to come from Whitbread and it could be worth buying. Here’s why.
Strong Results
Today’s results from Whitbread showed that the company is making excellent progress. For example, like-for-like sales increased by 6.8% year-on-year in the three months from May to August and total sales jumped by 12.8% in the same period. This shows that, while it may appear at first glance as though the market is saturated with Premier Inns and Costa Coffee outlets, there is still room for growth. Indeed, Whitbread plans to open 4,500 new Premier Inn rooms and 300 new Costa Coffee outlets this year, which represents a stunning rate of growth and one that could bolster the company’s bottom line.
Growth Potential
On the topic of growth, Whitbread has an enviable track record. It has increased earnings per share (EPS) in each of the last four years and has benefitted from a more price-conscious consumer – especially with regard to its budget Premier Inn brand. The future looks bright for the company’s bottom line, as the market expects it to grow by 13% in each of the next two years. If achieved, this would represent around twice the wider market growth rate.
Valuation
On the face of it, shares in Whitbread look expensive. That’s because they trade on a price to earnings (P/E) ratio of 21.9, which is well ahead of the FTSE 100’s P/E ratio of 13.8. However, when the company’s earnings growth rate is taken into account, the premium looks well worth it. For instance, Whitbread’s price to earnings growth (PEG) ratio is a very respectable 1.4, which shows that strong and reliable growth is on offer at a reasonable price.
Looking Ahead
As mentioned, Whitbread’s Premier Inn brand has benefited from a more price-conscious consumer in recent years. Although the UK economy is improving, there seems to be little sign of a reduction in demand for budget hotel rooms. Similarly, an improved macroeconomic outlook would undoubtedly be a good thing for Costa Coffee. More disposable income means more coffee sales and so, in the long run, Whitbread seems to be well positioned to capitalise whatever the economic scenario turns out to be.
