Theme park operator Merlin (LSE: MERL) has huge growth potential. It has released an update today that provides clues as to its future performance, while its valuation continues to hold appeal for long term investors. In fact, a share price rise of 20% or more over the medium term is very much on the cards.
Performing as expected
Today’s trading update from Merlin shows that it is performing in-line with expectations. Notably, underlying trading in the Midway Attractions Operating Group has remained consistent with that reported in the company’s September update. Furthermore, LEGOLAND continues to show strong growth, even with the strong comparables from the previous two years. While trading for LEGOLAND in Florida remains somewhat challenging, overall the chain is performing exceptionally well.
Merlin’s 2020 milestones continue to offer a bright future for the business. For example, it is progressing towards expanding its estate via the opening of LEGOLAND in Dubai, as well as the opening of Madame Tussauds in Istanbul. The company is on-track to meet its profit growth guidance for the 2016 financial year. Beyond that, its strategy seems to be sound and provides significant potential rewards given the level of risk being taken.
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Growth potential
Merlin is forecast to increase its bottom line by 11% in the current year and by a further 14% next year. Such high rates of growth have the potential to improve investor sentiment towards the company, especially when Merlin’s valuation is factored in. Merlin trades on a price-to-earnings growth (PEG) ratio of just 1.4, which indicates that its shares could rise by over 20% and still offer fair value for money.
Clearly, Brexit has the potential to cause a slowdown in discretionary consumer spending in the UK and Europe over the medium term. While this could cause Merlin’s operating performance to come under pressure, it remains an internationally focused business which should be able to take Brexit in its stride. Furthermore, Merlin could benefit from a weaker pound, since it reports in sterling and conducts a significant proportion of its business outside the UK.
A better option?
Of course, Merlin isn’t the only high quality consumer stock with 20%+ upside. Costa Coffee and Premier Inn owner Whitbread (LSE: WTB) trades on a price-to-earnings (P/E) ratio of 14.5. This suggests that it has a wide margin of safety, since Whitbread has growth potential both within the UK and on the international stage.
Part of Whitbread’s strategy within the UK is to increase the size of its estate, but to also develop greater customer loyalty through new and more varied products. This should help it to pass on a greater proportion of forecast wage rises over the next couple of years, while the scope to expand its store estate outside of the UK could prove to be a significant growth channel for the business.
Both Whitbread and Merlin offer 20%+ upside, but with Whitbread having a more loyal customer base it is more likely to weather any global economic storm which could lie ahead in 2017. As such, it seems to be the better buy right now.
