Can the concept endure?

So, I wonder whether Revolution Bars Group has the legs to make a decent long-term investment. Today’s report doesn’t soothe my doubts. Although sales rose 8.7% compared to the equivalent period last year, the increase is down to the opening of six new sites. Like-for-like sales actually declined by 0.6%, which suggests a less vibrant outcome than the headline figure would lead us to believe. In fact, adjusted earnings per share tumbled 11% and the directors put a brave face on things by holding the final dividend flat.

What really worries me is the long list of justifications for the poor performance such as “the uncertainty following corporate activity, management change, extremes of weather and the FIFA World Cup.” Ok, the company was subject to a takeover offer that fell through and key management including the CEO quit, but if the customers were packing the bars through the period, I reckon sales and profits would have been more robust, whatever was going on in the back rooms.

I’m wary that fickle customers may already be growing tired of the firm’s concept, so, despite my bullish article earlier in the year, I’ve changed my mind. I can no longer see the point of taking the risk of buying shares in Revolution Bars Group and would much rather go for a proven winner like mid-cap pub operator JD Wetherspoon (LSE: JD).

Piling them in

The Wetherspoon concept has far wider appeal and more or less operates at the other end of the scale from the ‘premium’ approach taken by Revolution Bars. In fact, Wetherspoon bases its business model on selling ‘cheap’, and I think a value proposition like that is far more suitable for a long-term investment horizon because the concept is unlikely to out of fashion.

One of the things I like about the firm’s annual reports is the way the firm lists its annual performance right from the beginning of operations in a similar way that Warren Buffett does with his firm Berkshire Hathaway. It makes interesting reading. In 1984 the firm turned over £818,000 for a pre-tax loss of £7,000, and in 2018 it saw revenue of almost £1.7bn and made a pre-tax profit of more than £107m.

Since the firm came to the stock market, shareholders have been rewarded with multi-bagging gains, and I think there’s more to come in the years ahead. Wetherspoon strikes me as a decent bet for long-term growth and I think the stock is well worth your research time right now.

The post With £2,000, I’d buy this growing mid-cap and sell this small-cap challenger appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any of the shares 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.

Despite this disappointment, I believe this out-of-favour chain of trendy bars could still be a compelling buy for value investors. Here, I’ll examine the issues and give my verdict on this stock.

I’ll also consider a 7%-yield consumer stock that could be worth a closer look.

More excuses – what’s gone wrong?

In a trading update this morning, Revolution Bars complained of “challenging and volatile trading conditions” during the half-year to 9 June. Although new openings lifted total sales by 7.3%, like-for-like sales were 1.7% lower. This suggests that sales at some older bars are falling.

Unusually, the company managed to blame both cold weather and hot weather for lower levels of “late-night week-end trading”. But sites with outdoor seating areas are said to have performed well during the recent hot weather. So the problem may be that customers chose pubs with beer gardens instead of stuffy indoor venues.

Management also believe that the “prolonged absence of a CEO” and the distraction caused by last year’s two failed takeover bids have also contributed to the poor performance.

The good news is that Rev Bar’s aptly-named new chief executive, Rob Pitcher, is due to start work on 25 June. And the company is already moving ahead with other operational improvements. A new staff scheduling system has been rolled out and improvements are planned to marketing and to the group’s underperforming food business.

New profit guidance

Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) are now expected to be below market expectations and in line with last year’s figure of £15.1m.

What does this mean for the stock’s valuation? Well, last year’s adjusted EBITDA translated into adjusted earnings of 14.2p per share. The last-seen share price of 139p puts the stock on a forecast P/E of about 10 for the year ending 1 July.

The group has very little debt, so I’d imagine that the forecast dividend will be left unchanged, at 5.2p. This gives the stock a prospective yield of around 3.8%, which is reasonably high for a small-cap growth stock.

What could go wrong?

It’s always important to consider what could go wrong when buying a stock. In this case I can see several potential problems.

The first is that this profit warning may not be the firm’s last. Like-for-like sales only rose by 0.4% during the first half of the year and by 1.5% last year. These figures suggest to me that when you consider the effect of inflation, LFL sales volumes were flat at best last year and may already have been falling during the first half of the current year.

Although food sales should offer potential for growth, a number of casual dining chains are suffering from over-expansion at the moment. Pubs chains offering food have admitted that conditions are very competitive. Can Revolution Bars really outperform in such an environment?

The group’s decision to continue rolling out new bars has meant that although underlying cash flow is quite good, the company has needed to borrow cash to afford both capital expenditure and dividend payments. Arguably this means the dividend is being funded with borrowed cash. Given that net debt was just £4.5m at the end of the first half, I’m not too concerned about this yet. But I would be concerned if net debt continues to rise.

Buy, sell or hold?

Revolution Bars’ rollout has been promising, but hasn’t quite delivered on expectations. However, the firm is taking steps to correct problems and address areas where it’s underperforming.

Incoming chief executive Pitcher has 25 years’ experience in the hospitality sector. His previous role was as a divisional director at pub group Mitchells & Butlers, where he was responsible for food-led brands Toby Carvery, Harvester and Stonehouse.

Revolution’s bars focus on premium drinks, so are heavily dependent on consumer spending remaining strong. A recession could hit the group hard. But if the economy remains stable, my view is that this company does offer a potential buying opportunity.

After all, it wasn’t long ago that Revolution received a cash bid worth 203p per share. With the shares trading at around 140p, I’d rate the stock as a speculative turnaround buy.

A retailer with a 7% yield

Another stock that’s performed well during this long period of cheap credit and low unemployment is furnishings and floorings retailer ScS Group (LSE: SCS). Even more than Revolution Bars, this is an extremely cyclical business. Sales could collapse if cheap credit dries up or if the economy goes into recession.

For now, trading remains fairly good. Revenue rose by 4.9% to £333m last year while earnings rose by about 8% to 23.5p per share. Analysts expect the firm to report revenue growth of about 5% and earnings growth of around 2% for the current year, which ends on 29 July. On 21 March, management confirmed that trading for the year to date was in-line with expectations.

The company ended last year with net cash of £40m and no debt. Although some of this cash represents advance payments from customers, the group’s net cash position suggests to me that it could survive a downturn in sales more easily than rival DFS Furniture, which has substantial borrowings.

The group’s strong cash generation and lack of debt also means it’s able to pay generous dividends. This year’s forecast payout of 15.9p per share represents a forward dividend yield of 7%.

One to buy?

Like Revolution Bars, I believe ScS should continue to do well if the UK economy remains stable. I don’t have a strong view on the outlook for the economy, but I’d rate this stock as one of the more attractive options in this sector.

If you’re looking for a high-yield income stock with some growth potential, ScS could be worth considering.

The post 2 super dividend growth stocks that could smash the FTSE 100 this year appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares 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.

The firm provides information technology infrastructure services in the UK, Germany, France and Belgium and business has been stable and growing. I first noticed Computacenter around 2011 and saw that it was producing consistent annual gains in earnings and a steady increase in revenues most years. Over the last four years alone the dividend has gone up 45% and the share price has risen 60%.

Ahead of expectations again

In today’s pre-close trading update for the trading year to 31 December, the directors said they anticipate that adjusted pre-tax results for the year will be ahead of their most-recent expectations. They pointed out that they upgraded their expectations “a number of times” throughout 2017, which means it’s even more impressive that the firm’s performance is beating predictions now.

Revenue in constant currency for the year increased 12% compared to the previous year with all trading regions and all of the firm’s sectors rising. There’s strong evidence that Computacenter is generating decent profits from this turnover with the net cash figure of just over £191m, which is more than 30% higher than a year ago. However, because extended credit terms with one of the company’s major suppliers will end and revert to standard credit terms, the net cash position will shrink by just over £27m going forward.

The directors expect the positive momentum to continue during 2018 but said that a number of one-off costs and investments will likely “hold back the enhancement of profitability.”  However, 2019 looks set to be a good year for advances in earnings. I would see any weakness in the share price or any period of sideways movement that may result from this news as a good opportunity to invest in Computacenter.

Hitting the spot with customers

If you are looking for something a little more adventurous, you may be interested in today’s trading update from Revolution Bars Group (LSE: RBG), which resides in the FTSE Fledgling index and has a market capitalisation of just over £86m. The big attraction of smaller firms is that the shares can move quickly and that little companies can grow into larger companies if things go well. Balancing that attraction is the higher risk that tends to come with smaller firms.

Revolution Bars operates 72 premium bars in the UK, branded Revolution and Revolucion de Cuba. For the 26 weeks to 30 December, which includes the important Christmas and New Year trading period, sales were almost 11% higher and like-for-like growth in revenue over the key Christmas trading period came in almost 6% higher than a year ago.

The directors said this is the fifth consecutive year that the firm has enjoyed record sales in the festive period, which I reckon suggests the firm’s offering clicks with customers. Meanwhile, it has a good record of raising its dividend every year and I think it would be well worth your time researching the investment opportunity.

The post 2 growth and income stocks I’d buy right now appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any of the shares 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.

Back to form?

For the 20 weeks ending 21 May, like-for-like sales fell 1.8%, with total sales down 1.5%. That may not sound great, but a quick check of the company’s full-year results announced in March shows that this actually represents something of an improvement. Back then, the company revealed like-for-like sales had dipped 3.9%.

Ahead of today’s AGM, Chairman Debbie Hewitt stated that the company had seen “strong performances” from its Concessions and Pub businesses thanks to an increase in passenger numbers and good weather respectively. With many of its sites being in close proximity to cinemas, the Leisure business also appears to be benefitting from healthy admissions at the latter.  

Reflecting that 2017 would be “transitional” for Restaurant Group, Ms Hewitt stated that the company expected to deliver pre-tax profits in line with current market expectations. 

Since January 2016, shares in the firm have sunk from almost 700p to around the 300p mark. They currently trade on a price-to-earnings (P/E) ratio of 14, falling just below this number in 2018 if an understandably modest earnings target is achieved. With a fairly robust balance sheet and near 5% yield on offer for those with the patience to wait for a full recovery in the company’s fortunes, is it now time to take a position?

I’m not convinced. While today’s news (and an upgrade from JP Morgan Cazenove) will no doubt be welcomed by weary holders, I’m still unsure as to why (given the myriad of options available in the market) investors would choose to pile into this stock over others. The same kind of rationale applies to its customers. Sure, menus can be simplified, popular dishes reinstated and prices dropped, but what is there to differentiate Restaurant Group’s offering from the competition? 

While a gradual rise in the share price is possible from here, the lack of any meaningful advantage over its opposition makes me think this stock is still far too expensive to buy.

A far more tempting opportunity

Another company that faces significant near-term hurdles is small-cap Revolution Bars (LSE: RBG). Having been fairly bullish on the stock in the past, I must admit that I was taken aback by last week’s warning by management that costs would be higher than expected and that, consequently, earnings per share growth for the current year would be flat.

Given the market’s tendency to over-punish what it least expects however, I suspect the reaction to this news was overdone. A huge drop in the share price leaves the shares trading on a P/E of just under 10 for the 2016/17 financial year, reducing to eight in 2018 (based on expectations of 16% earnings per share growth). Compared to Restaurant Group, I’m sure most contrarians would find this kind of valuation far more appealing.

Although further profit warnings can’t be ruled out, I remain optimistic on cash-rich Revolution’s prospects over the medium term. A juicy, well-covered 4.6% yield is also adequate compensation for those willing to place an order at the current time.

The post With the turnaround under way, is Restaurant Group plc now too cheap to ignore? appeared first on The Twelfth Magpie.

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Paul Summers has no position in any shares 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.

Revolution was looking like a classic growth story since flotation in March 2015, trading on a modest valuation with a forward P/E of around 13. Earnings per share in 2016 climbed by 14%, and we had forecasts of 7% and 16% growth for this year and next respectively. The dividend looked set for a progressive few years too, and though yielding only around 2%, that’s decent for a company at this stage in its development.

No growth

Then on Friday, the company warned that no growth is likely this year after all, and that EBITDA (pre-opening costs) is now “expected to be broadly at the same level as last year.“

The cause, it seems, is twofold. Firstly, the living wage, increases in minimum wage, the apprenticeship levy, and the rise in general business rates have all been blamed for costs that are now going to be more than anticipated.

On top of that, the bars opened during the past 12 months are apparently “taking longer to mature to full profitability than originally anticipated“, though apparently raking in an average turnover of £43,000 per week. And if that wasn’t enough, two bars in those hotbeds of revelry, Blackpool and Cardiff, were closed for two weeks for refurbishment.

Same old story

What’s happened here is something that I’m always banging on about, and I’ve seen it many times in my years of watching growth shares. An attractive candidate does well as long as the news flow is always at least as good as expected — and Revolution shares had been appreciating nicely since last summer. But when something downbeat comes along, wham, a price collapse.

If we assume EPS for 2017 will now be flat, the fallen share price would suggest a forward P/E of under nine, which would look like a screaming bargain for a growth share in normal circumstances — and the forecast dividend would be very well covered too. It’s often events like this that have me seeing a rare buying opportunity for an otherwise missed growth boat, so why am I feeling a bit twitchy in this case?

For one thing, those extra cost drivers of living wage and minimum wage, well, they didn’t suddenly come out of the blue, and I’m a little disappointed that the company had apparently not noticed these “well-publicised sector cost headwinds” until so late — its year ends 30 June. 

Optimism overdone?

Revolution also assures us that the bars whose maturity is a little late in coming “will make a full profit contribution in our next financial year.” Now, that would normally be good news, but I don’t like companies painting their hopes with a gloss of certainty like that.

What I take from the statements about maturity and about next year’s contributions is: These bars have so far not yet done as well as we’d hoped, but we’re optimistic about next year’s profitability — and we surely can’t assume any more than that at this stage.

Chief executive Mark McQuater speaks of “the business’s capability to deliver high returns on invested capital“, but I can’t help wondering if buying now might be throwing money into a pit. I’d definitely wait and see.

The post Is Revolution Bars Group plc a falling knife to catch after dropping 35% today? appeared first on The Twelfth Magpie.

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Alan Oscroft has no position in any shares 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.

Greene King appears to be well positioned for the festive season. But another stock that looks increasingly attractive to me is fast-growing Revolution Bars Group (LSE: RBG), which has just opened four new venues in times for the Christmas party season.

Both companies look affordable, and offer attractive dividend yields. But which one could be the right choice for your portfolio?

Property & pints: a winning formula?

Greene King is busy updating and converting the pubs it acquired when it bought Spirit Pub Company last year. In today’s results, Greene King says that sales have risen by an average of 30% at the 50 pubs which received “brand conversions” during the first half of the year.

Operating profit increased across the pub’s operating divisions, pushing adjusted earnings per share up by 4.3% to 36p. This puts Greene King on track to meet full-year forecasts of 72p per share, which equates to a forecast P/E of 9.6.

Of course, one reason for this low valuation is that Greene King has a lot of debt. Net debt of £2.2bn equates to 4.2 times the group’s earnings before interest, tax, depreciation and amortisation (EBITDA). That’s very high, but it’s made more acceptable by Greene King’s £3.7bn property portfolio.

This gives the group a loan-to-value ratio of 59%. That’s also relatively high, but the group’s debt has an average life of eleven years and is mostly fixed rate. If the market remains stable, these borrowings should gradually start to fall.

In the meantime, Greene King’s 4.7% dividend yield looks attractive. Although Greene King isn’t a bargain, income investors may want to take a closer look at current levels.

This growth star could double

If you are looking for an exciting small-cap company with serious growth potential, you may want to consider Revolution Bars. The group, which has a market cap of £91m, is rolling out its upmarket Revolution and Revolución de Cuba bar formats across the UK.

Revolution’s sales rose by 6.9% last year, while adjusted earnings per share rose by 14% to 14.6p. The group also paid a 4.8p dividend, giving a trailing yield of 2.6%.

Revolution has a massive advantage over some of its peers. The group’s expansion is being funded entirely from its operating cash flow. There’s no debt. This significantly reduces the risk of investing. The group’s high margins and strong cash flow also mean that when expansion slows, cash available for shareholder returns should rise sharply.

I’m not really sure why Revolution Bars’ shares have performed so badly this year. They’ve risen by just 5%, and currently trade on a forecast P/E of 11, with a prospective yield of 3%. That looks too cheap to me, given that earnings per share are expected to rise by about 14% over each of the next two years.

In my opinion, this well-run business looks like a decent buy at current levels.

The post Time to raise a glass to Greene King plc & Revolution Bars Group plc? appeared first on The Twelfth Magpie.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.