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 (LON:WTB), 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 Entertainments (LON:MERL), 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.
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