Elsewhere in the Travel & Leisure sector, shares of small-cap City Pub Group (LSE: CPC) have held up rather better. They’re up a tad today, on the back of a trading update, and are little changed from this time last year.

Here, I’ll discuss whether I believe easyJet is now a FTSE 100 bargain, and whether City Pub Group could also have investment appeal.

Strong growth prospects

You may not have heard of City Pub Group, but its boardroom is packed with industry veterans. Indeed, several directors were behind a previous highly successful enterprise, Capital Pub Company, which they founded in 2000 and sold to Greene King, after a bidding war with Fullers, in 2011.

Capital Pub Company was focused on London, but the geographic footprint of City Pub Group extends beyond the capital, with — in addition to 17 London houses — pubs as far afield as Brighton, Exeter, Oxford and Norwich.

In today’s trading update, management reported “continued strong momentum” in the business, with sales for the 19 weeks to 12 May up 35% on last year. It said the company’s well placed to meet its expectations for the year as a whole, and to grow its current 45-site estate to 65-70 sites by mid-2021.

At a share price of 230p, the company’s market capitalisation is £141m, and it trades at 25.8 times current-year forecast earnings of 8.9p a share (up from 3.23p last year). The rating is a premium one, and the running dividend yield is a modest 2%.

I’m attracted by the group’s growth prospects, its strong, property-backed balance sheet, and its proven, high-quality management team. But I think the valuation is just a little too rich at present. As such, I rate the stock a ‘hold’.

Great opportunity for long-term investors

Budget airline easyJet may be a low-cost flyer, but it’s a top-notch operation, in my opinion. And the business is underpinned by — look away now Thomas Cook shareholders — a market-leading balance sheet.

Profits can be somewhat variable year-to-year, with things like fuel prices and exchange rates coming with the territory. But these things ebb and flow, and it’s the longer-term performance we should focus on.

I think this applies not only to the perennial variables, but also to a big one-off factor currently in play. Namely, as the company said in last week’s half-year results — reviewed by my colleague Peter Stephens — “the ongoing negative impact of Brexit-related market uncertainty.”

For the company’s current financial year (ending September), City analysts are forecasting a 3% decline in underlying earnings to 114.4p a share from last year’s 118.3p. And because the company’s policy is to pay a dividend of 50% of underlying earnings, we can also expect the dividend to drop to 57.2p from last year’s 58.6p.

At a current share price of 1,000p, you’re paying just 8.5 times forecast earnings, and getting a prospective 5.7% dividend yield. With City analysts forecasting a return to growth next year, and easyJet being well prepared for any Brexit outcome, I believe the current weakness in the shares represents a great opportunity for long-term investors to buy into a terrific business.

The post Is the easyJet share price a FTSE 100 bargain? appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Fuller Smith & Turner. 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.

Greene King (LSE: GNK)

FTSE 250 — founded 1799 — share price 664p — market-cap £2,058m

Has a chief executive of 14 years standing. The biggest of the three groups, with two breweries and an estate of 2,798 outlets across England, Wales and Scotland. Also, a nice perk of discounts on food and drink for shareholders owning a minimum of 100 shares.

Fuller, Smith & Turner (LSE: FSTA)

FTSE SmallCap — founded 1845 — share price 1,150p — market-cap £637m

Another venerable pubs group and brewer, it also offers shareholder perks (on a minimum holding of 500 shares). Descendents of the founders remain major shareholders and stewards of the business. Geographical focus of 385-pubs estate is London and southern England.

City Pub Group (LSE: CPC)

FTSE AIM — founded 2011 — share price 237.5p — market-cap £146m

Relatively new company, but key members of team are industry veterans. Previously founded Capital Pub Company in 2000, sold to Greene King in 2011 after it trumped an offer from Fullers. City owns fewer pubs (44) than Fullers, but geographic footprint is similar.

Valuation

The table below shows some key metrics for the three companies.

The asset valuation P/TNAV (market-cap divided by tangible net asset value) is broadly similar for the three companies. The variances in the other metrics — the earnings valuation EV/EBITDA (enterprise value divided by earnings before interest, tax, depreciation and amortisation), net debt/EBITDA (a measure of balance sheet strength) and dividend yield — largely reflect their relative stages of growth/maturity.

If I already owned these stocks, I’d be inclined to continue to hold. However, for a different reason in each case, I’m not moved to buy right now.

Waiting game

Most of my Motley Fool colleagues are keen on Greene King, because of its cheap earnings rating and high dividend yield. However, while property-backed pub groups can tolerate a higher level of debt than many businesses, and Greene King’s net debt/EBITDA is within management’s target range, I do find the level a little concerning. Particularly as one analyst has suggested there’s something of an element of smoke and mirrors in the company’s current programme of refinancing high-interest bonds. I’d like to have a close look at the next annual report before committing here.

I’m holding off on Fullers for the moment because it’s recently agreed to sell its brewery (and associated businesses). This is a big deal. The EV of £250m being paid for the assets compares with a current total group EV of £860m. I’m minded to wait and see how Fullers’ numbers stack up after this significant disposal.

Finally, City deserves a higher earnings rating as a fast-growing business. But I think the EV/EBITDA of 19.5, as well as P/TNAV of 1.9, are just a bit too high. Predecessor Capital was sold to Greene King at ratings of 13.7 and 1.7. I reckon the market has inflated City’s valuation due to management’s past success with Capital, and I’m looking for a lower entry level.

The post 1 FTSE 250 high-yielder and 2 small-caps I’m considering buying appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Fuller Smith & Turner. 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.

As one of the largest pub operators in the UK, Marstons’ growth is nothing to get excited about. Over the past six years, revenue has risen at a compound annual rate of 6.6%, but costs have increased faster. The group’s operating profit margin has declined from 18.7% in 2012 to 17% for 2017. City analysts have pencilled in a 6% decline in earnings per share for 2018, as costs continue to rise following the increase in the minimum wage earlier this month. 

In my opinion, City Pub is better placed to weather rising costs due to the nimbleness that usually comes with smaller companies. More prominent businesses like Marstons tend to have bloated cost bases that are difficult to rationalise, but smaller companies typically have a tighter grip on costs and can move faster to offset cost pressures that threaten profit. 

Rapid growth 

Today’s results from City Pub go somewhere to affirming this view. For the year to the end of December, the company saw revenue growth of 35% to £37.4m, and adjusted profit before tax jumped 102% to £3.2m, although after excluding the impact of one-off exceptional items, the group reported a loss of £0.7m, down from last year’s profit of £0.4m. 

Digging into the figures, it seems the bulk of the exceptional costs booked for the period were related to City Pub’s IPO last year, which cost £1.9m. There’s also a charge of £852k for pub opening costs and £450k charge for the impairment of a pub site. As the business continues to expand, pub opening costs will continue to weigh on profitability. However, expansion costs should be more than offset by the additional profitability these new pubs contribute. 

It currently has seven new pubs in development, which will increase the size of its pub portfolio by 20%. City analysts believe these new openings will help the group grow earnings per share to 7.2p by 2018. Management is so optimistic about the future today it has announced a 50% increase in City Pub’s dividend to 2.3p. 

A price worth paying? 

With earnings per share set to grow nearly four-fold between 2016 and 2018, it’s no surprise shares in City Pub trade at a high valuation of 22.2 times forward earnings. Still, if the company can achieve the growth analysts are predicting, in my opinion, it deserves this high multiple. 

On the other hand, shares in Marstons are more appropriately priced. The stock trades at a forward P/E of 6.9 and supports a dividend yield of 7.7%. The yield is so high because investors seem to be worried about the company’s ability to be able to navigate higher costs and falling discretionary incomes. However, so far management has done an excellent job of managing the hostile retail environment, and with the dividend covered twice by earnings per share, it looks as if the payout is here to stay for the time being.

The post One 7.7% yielder I’d buy alongside this growth monster appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Rupert Hargreaves owns no share 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.