Hobson on Whitbread, Hornby and Saga

THE WEEK: Morningstar columnist Rodney Hobson gives his views on this week's top stock moves and news

Rodney Hobson 23 June, 2017 | 11:42AM

Investors certainly seem to get jumpy whenever Whitbread (WTB), the Costa Coffee and Premier Inns operator, makes an announcement. The trading update accompanying strong full-year figures two months ago was quite positive but the shares fell sharply. Too sharply in my view and I took a small stake.

This week we had first quarter figures that again looked pretty good but, once again, the shares initially fell back, although this time reality prevailed more quickly and they were soon ahead of the previous close. Even so, they were still 10% below the level they enjoyed at the start of last year, before worries over a possible fall in consumer spending took hold.

It has been a rollercoaster ride for the shares over the past 18 months as they have bounced around between £34 and £43, providing great opportunities to buy or sell. They currently stand around £39.

It is perfectly reasonable in the current economic climate to be cautious of any company that depends heavily on consumer spending but I can’t see why people who are willing to spend £3 on a cup of coffee might suddenly consider it overpriced. In contrast, Premier Inns are thriving because they offer excellent value at a time when the weak pound is boosting the tourist industry. Revenue per room was up 3.1% in the first quarter.

Whitbread shares sell on 16 times earnings and offer a yield of 2.5%. That rating is not compelling but any fall in the share price should be seen as a buying opportunity.

Price Crash for Toy Train Maker

I’ve learnt a lot of lessons from buying shares in toymaker Hornby (HRN), all of them bitter. It’s the only stock in my portfolio that was high risk, which clearly doesn’t suit my investing style, and the only one where I allowed nostalgia to override fundamentals. I failed to get out and cut my losses when the writing was on the wall. This indulgence has produced what is mercifully my only serious long-term loss. Thank goodness it was only a modest punt that I made.

Hornby is now subject to a mandatory takeover bid from private investment fund Phoenix UK, which is taking its stake to 55%. The offer price of 32.375p cash is the least that Phoenix can offer and is a far cry from the 150p peak Hornby reached about seven years ago. Hornby says the offer "significantly undervalues Hornby and its future prospects” and advises shareholders to take no action but I am at last facing facts. Hornby continues to lose money at an alarming rate and the turnaround plan is still in the sidings.

There is one golden rule I follow without exception. I do not invest in companies where a single investor has more than 50%. There will be only one chance to get out, for Phoenix will not extend the offer beyond the first closing deadline. I will accept immediately the offer is formally launched.

Sage Saga

Those who believe that no news is good news will have been heartened by the latest brief update from Saga (SAGA), the provider of services to the growing band of over-50s, issued at the AGM.

The message was simply that the core insurance and travel businesses have continued their good start to the year despite “the backdrop of a changing political and economic environment”. 

I’m not normally keen on holiday companies but Saga is expanding its cruise operations, where it has a strong reputation among those who like smaller ships. A major competitor went under earlier this year but there is nothing fundamentally wrong with this market.

I don’t go for new listings, either, which is why I have not considered Saga so far, but it has been around long enough now for investors to make a reasonable assessment. The shares have drifted from 215p over the past three months and I reckon they are worth looking at whenever they dip below 200p. They offer a solid dividend and a decent yield.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Hornby PLC37.90 GBX-3.07-
Saga PLC126.20 GBX-0.79-
Whitbread PLC4,721.00 GBX0.66-
About Author Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.