Whitbread woe as UK consumer feels the pinch, while US stocks suffer from tax plan confusion

It’s not just the squeezed consumer who is suffering from low wage growth and rising prices, it’s now starting to hit the corporate sector too. Whitbread, the owner of Premier Inn, the hotel chain, and Costa Coffee, may have beaten analyst expectations for earnings per share, which rose 7.3% to 143.7p, easily beating expectations of 138p, but that was not enough to stem a near 5% drop in the share price so far today.

It’s not just the squeezed consumer who is suffering from low wage growth and rising prices, it’s now starting to hit the corporate sector too. Whitbread, the owner of Premier Inn, the hotel chain, and Costa Coffee, may have beaten analyst expectations for earnings per share, which rose 7.3% to 143.7p, easily beating expectations of 138p, but that was not enough to stem a near 5% drop in the share price so far today.

Weak pound hits coffee imports

The trouble for Whitbread is the weak outlook for consumer spending on the one hand, and on the other hand rising input costs including the price of coffee, labour and business rates. This is already eroding profits, with underlying operating profit falling 4.6% in the first half. Although the company has done a good job at managing costs, it still was not enough to boost profits at Costa, where profits in the first half of the year were flat. The weak pound is partly to blame for the surging cost of coffee, and while the outlook for the pound remains uncertain it is going to be tough for Whitbread to keep cutting costs at this pace, which means reduced profit growth in the future is highly likely.

Whitbread finds company with peers, as sector shunned

This hurts any share price, and Whitbread is definitely feeling the pain today. The entire consumer discretionary sector is the third worst performing sector on the FTSE 100, with Merlin entertainment, the owner of visitor attractions like Legoland and Alton Towers, also a weak performer on the FTSE 100 today, down some 1.6% already.

Whitbread is no outlier in its sector, privately-owned Pizza Express also saw earnings fall nearly 14% in the first half of this year, citing a challenging consumer environment in the UK. This is not an easy environment for the entire sector, and we would expect further declines after the Whitbread share price sliced through some key technical levels on its drop to its lowest levels so far this month. September’s low at 3600 is now in sight, ahead of the lowest level so far this year at 3365.

Whitbread and co, valuations and further stock price decline

The trouble for Whitbread and Merlin is that their stock price still doesn’t look cheap based on their P/E ratios. Whitbread’s P/E is nearly 15, while Merlin’s is nearly 18. This makes the stock price even less attractive at this mature stage of the stock market rally when investors are looking for steady income returns and good value, the consumer discretionary sector has neither at this stage.

Overall, pockets of woe in the market have not been enough to really knock the FTSE 100 off course, even though it has turned slightly to the downside after failing to break 7,600, the highest level since June. The FTSE 100 is following the general trend in markets right now which is to inch higher for a few sessions before pulling back. This is definitely not exciting territory for traders, but it also doesn’t herald the much anticipated sell-off, which still looks some way off.

Elsewhere, fairly decent October PMI data for the Eurozone has “boosted” the euro, which is up some 0.3% since the data release. This pair is basically treading water until traders hope to get some real direction from the ECB later this week.

Confusion over the Trump tax plan could hit US stocks

In the US, initial joy at President Trump’s tax plan has been clouded by some confusion after Treasury Secretary Mnuchin was rebutted for saying that a family could save $1,000 per year under the Trump tax plan. The White House Budget Director admonished Mnuchin, saying that attempts to predict the impact of the plan are futile because so many details have yet to be ironed out. Contradictory statements from the White House didn’t help to boost stock market sentiment, with US stocks having their first losing session on Monday in a week. House Republicans want to unveil a detailed tax plan as early as next week, and vote on the issue before the Thanksgiving break, however, if the White House Budget Director suggests that the details are yet to be finalised then this looks ambitious. Overall, US stock market bulls had better hope Trump’s tax plan has a better outcome than the his healthcare plan, but with 52% of the public opposing the tax plan and only 34% agreeing with it, it could be a tough sell. This morning US stock market futures are pointing to a slightly positive open for US stocks later today, although any signs that the tax plan could be delayed, or would fail to pass a vote in Congress, could trigger a sharp sell-off. All eyes will be on its development in the coming weeks. 

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.