Whitbread PLC’s (LON:WTB) stable earnings sentiment has analysts projecting positive growth of 7.80% annualised over the next few years, but it’s necessary to take a moment and evaluate this appraisal. Those invested in the stock should contemplate the factors that are causing this projected increase, because the sustainability of returns to shareholders can be impacted on in different ways. To help investors get a top level understanding, I will try to evaluate Whitbread’s margin behaviour to help recognise the underlying make-up of revenue and expenses that is responsible for driving future earnings expectations and what it means for WTB’s returns relative to its competitors.
What does WTB’s profit margin tell us?
Attractive margins generally indicate a desirable ability to translate sales revenue in to earnings, and return for shareholders. WTB’s profit margin will help us understand the extent of this ability, as well as identify the forces behind earnings expectations.
Margin Calculation for WTB
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = UK£438.00m ÷ UK£3.30b = 13.29%
Whitbread’s margin has contracted in the past five years, due to a 10.55% average growth in revenue exceeding average net income growth of 8.99%, which suggests that a smaller percentage of revenue falls to the bottom line despite the fact revenue has increased over the previous 5 years. WTB’s most recent margin of 13.29% appears to follow this trend, which could imply that increasing revenue has driven earnings growth rather than enhanced cost management.
What can we tell from future expectations?
Forward looking projections suggest margins will shift towards expansion, with an expectation of 5.97% in annual revenue growth and a forecasted 7.80% in annual net income growth. This suggests future earnings growth is driven further by enhanced cost efficiency alongside revenue increases, which is enlarging the incremental amount of net income that is retained from the forecasted revenue growth. Nonetheless, those watching the stock must know a expanding margin can hold various implications on the company’s performance depending on how it operates, which makes further research very important. Generally, it is useful to judge profit margin and its implication on return in comparison to other companies who share similar traits. For Whitbread in particular, it is expected that profit margins will expand along with the Hospitality industry margins, whilst at the same time, the forecasted ROE of Whitbread is greater than the industry at 16.24% and 10.39% respectively, although it must not be forgotten than this result is influenced by the company’s debt levels. This highlights that analysts are confident that the underlying earnings characteristics mentioned above will provide a higher return for shareholders in relation to the industry. However, margins use items on the income statement that are prone to being manipulated by various accounting measures, which can distort our analysis. Thus, it is essential to run your own analysis on Whitbread’s future earnings whilst maintaining a watchful eye over the sustainability of their cost management methods and the runway for top line growth.
For WTB, I’ve put together three relevant factors you should further examine:
- Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Valuation: What is WTB worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether WTB is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of WTB? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.