I’m not surprised to see that veteran fund manager Neil Woodford has fallen back in love with British American Tobacco (LSE: BATS) this year. It’s a company I’ve long been keen on and I’d happily buy the stock at its current price of 4,150p.
I’m far less enthusiastic about another Woodford holding, Hostelworld (LSE: HSW), which released its half-year results today. Woodford has been reducing his stake in this business at the same time as ploughing cash into the FTSE 100 tobacco behemoth. Personally, I’d go further and sell out of Hostelworld completely.
Mixed bag
Hostelworld’s shares are down 8% to 270p on the back of today’s results. They’ve now declined 30% since the start of the year, probably not helped by Woodford reducing his stake over the period (from above 25% to 18.85%).
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Today’s reported 9% decline in revenue and 26% fall in adjusted profit after tax are not as bad as they appear. Hostelworld has rolled out a new free cancellation booking option. As a result, a chunk of revenue will only be recognised, net of cancellations, in future periods, while costs associated with this revenue have already been booked.
Meanwhile, cash on the balance sheet at the half-year-end was €22.9m — up from €17.7m at 30 June last year — and the company has no debt. The board declared a 6% lower interim dividend, but the running yield is a juicy 5.5% at the current share price.
Fierce competition
In view of the deferred revenue, strong balance sheet and high dividend yield, I don’t dismiss Hostelworld lightly. However, the company is operating in an increasingly competitive marketplace, particularly in Europe. Bigger generalist operators, such as Expedia-owned Hotels.com are treading on Hostelworld’s toes and a rising alternative accommodation sector (think Airbnb) is also providing fierce competition.
Hostelworld’s longstanding chief executive and finance director have both decided to move on this year. Their replacements appear perfectly competent, but the loss of two key executives at the same time isn’t ideal. With the board currently reviewing the group’s strategy and the stock trading at over 16 times current-year forecast earnings, I see better value and greater certainty in British American Tobacco (BAT).
Next generation of shareholder returns
The history of BAT and its investment credentials are neatly summarised in a recent post on the Woodford website. The post also explains why Woodford exited his position in the stock in June 2017 and bought back in May this year. In short, he reckoned BAT’s valuation had reached fair value in 2017 but that “this period of fair valuation was short-lived” and the stock returned to “a more attractive valuation level” in the first half of this year.
In reviewing the group’s half-year results in July, my Foolish colleague Ian Pierce also discussed the attractions of a business that is continuing to increase underlying revenue and profit (and dividends) despite declining industry volumes in traditional tobacco products. I believe pricing power and the growth of next generation products will keep cranking shareholders’ returns higher for many years to come.
Trading at 14 times current-year forecast earnings with a prospective dividend yield of 4.9%, BAT is one of a number of FTSE 100 stocks I’d be happy to buy and hold for the long term.
