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Whitbread growth potential despite downbeat economic outlook

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The UK’s dire economic prospects may dissuade some investors from purchasing domestically-focused stocks. After all, the IMF forecasts that the UK economy will contract by 0.6% this year as high inflation and rising interest rates create tough conditions for businesses and consumers.

However, over the longer-term, now could be an opportune moment to buy shares in high-quality firms such as Premier Inn owner Whitbread [LON:WTB]. Its sound financial standing, expansion prospects and improving market position mean it offers significant capital growth potential as the UK economy ultimately recovers.

Sound positioning

A tough period for the travel and leisure industry, which has included the pandemic, rising energy costs and weaker demand caused by the current economic slowdown, has put pressure on hotel room supply. This creates an opportunity for financially sound firms, such as Whitbread, to increase their market share in order to capitalise more fully on an eventual improvement in the industry’s outlook.

It also means the company’s pricing power is stronger than would normally be expected during an economic slowdown. This, alongside an efficiency programme that is due to yield around GBP100m in cost savings over the next three years, is set to allow the firm to overcome rising costs in a period of rampant inflation.

Its vertically integrated business model that does not rely on third party booking sites also means it is well placed during a period of fast-paced cost rises.

In addition, the company’s financial standing means it is in an enviable position compared with sector peers in what remains a relatively fragmented budget hotel market. Whitbread currently has a net cash position of GBP284m, which suggests it is well placed to ride out recent interest rate rises and invest now for future growth.

Diversification and growth potential

International expansion forms a central part of the company’s growth plans. It now has 45 hotels in Germany, with a further 36 in the pipeline, and expects them to deliver a 10% to 14% return on capital over the long run. Although the firm’s German operations are forecast to be loss-making in the current year, they nevertheless provide welcome diversification benefits and growth potential.

The firm also has a large pipeline of rooms in the UK, where it expects to grow room numbers from 82,700 to around 125,000 over the long run. In tandem, it is seeking to upsell customers to better rooms that include more amenities to maximise profit per customer and is rolling out new concepts such as smaller rooms in city centre locations via its Hub division.


Whitbread’s focus on value for money may resonate with consumers who are likely to become increasingly price conscious as the cost of living crisis continues. Leisure and business travellers may trade down to Premier Inn to cut costs, for example, which could allow the firm to outperform more expensive rivals in the coming months.

Margin of safety

Of course, Whitbread’s share price could be negatively impacted in the short run by a recent change in CEO and the aforementioned slowdown in the UK’s economic growth rate. However, with the stock trading at a 25% discount to its pre-pandemic level, it appears to include a wide margin of safety when its growth potential and solid financial position are taken into account. Therefore, despite an uncertain near-term outlook, it offers investment appeal for the long run.

The FTSE100 company opened trading today (15th February) at 3,106p, and has offered a year-to-date return of 20.5%, a one-year return of -3.2% with its shares ranging between 2,245.5p and 3,253p over a 52-week period.

Deshe Analytics rate Whitbread as a ‘Hold’. The analyst said: “Whitbread plc’s financial results from 3Q23 demonstrated decent performance, but will likely only help Whitbread plc remain on par with its peers. This typically translates into the stock performing on par with market performance for the upcoming quarter. Overall, Whitbread plc’s growth, value, and income factors are trending positively, and we, therefore, give Whitbread plc an overall grade of 71.”

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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