At 2,532p, Premier Inn owner Whitbread (LSE: WTB) has seen its share price slide by around 20% over the past year.
Is this a buying opportunity for me, or should I avoid the shares? Here are three reasons for me to buy and three reasons to avoid the shares.
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First reason to buy — cyclicality
It’s no secret that the hotel business is cyclical. Sales, profits, cash flow and turnover all tend to drop back in a general economic downturn. And that could explain the company’s weak share price now.
However, cyclicals can recover fast when the next upturn arrives. And stocks in general tend to be predictive. So that means Whitbread’s share price could turn up before we see the obvious signs of recovery in the economy.
Meanwhile, the company’s been posting some impressive figures. In October with the half-year report, the directors said first-half profits exceeded pre-pandemic levels. And, looking ahead, market demand remains “robust” in both the UK and German operations.
On top of that, growth is on the agenda. Whitbread is “on course” to add between 1,500 and 2,000 rooms in the UK and between 2,000 and 2,500 rooms in Germany. And that’s during the current trading year to March 2023.
Whitbread shares could be heading for a cyclical rebound higher.
Second reason to buy — brand strength
Most people have probably heard of Whitbread’s Premier Inn hotel brand. And chief executive Alison Brittain said the company is maintaining its position as “the UK’s number one hotel chain”. It also has clear ambitions to expand in Germany.
I think brand strength is a good reason for me to buy some of the shares.
Third reason to buy — earnings
During 2020 in the pandemic year, Whitbread’s earnings were zero. The company made a loss. However, there’s a clear recovery under way. And City analysts expect robust single-digit percentage advances ahead.
There’s a good chance the trend in earnings will continue. And cyclical companies can behave like growth companies during the up-stage of their cycles.
First reason to avoid — Cyclicality
Cyclicality is a double-edged sword. Cyclical businesses can deliver cracking returns for shareholders when the trend is rising. But losses can be just as powerful during a down-leg.
If general economic conditions worsen, Whitbread could prove to be a poor investment for me. Unfortunately, timing an investment into a cyclical stock can be tricky.
Second reason to avoid — size
With a market capitalisation of just over £5bn, Whitbread is a large beast. That’s not a bad thing in itself. After all, the business is the market leader. However, I could get more bang for my bucks by choosing a smaller cyclical business.
Third reason to avoid — debt
Whitbread carries a fair debt load. And it’s always my preference to target companies holding as little debt as possible. Indeed, cyclical outfits often need a great deal of strength in their balance sheets to survive economic downturns.
But even with those negatives, on balance, if I had the cash to spare, I’d invest in Whitbread now.
