Why Whitbread and WPP have recovery potential

Robert Stephens, CFA, considers why FTSE 100 stocks Whitbread and WPP offer long-term turnarounds despite a weak short-term economic outlook.

It’s difficult to feel upbeat about the near-term prospects for some FTSE 100 stocks. Companies such as Whitbread (LON:WTB) and WPP (LON:WPP) are very dependent on the macroeconomic outlook. Therefore, they continue to face extremely difficult trading conditions that are likely to lead to worsening financial performances.

However, both companies have long-term recovery potential in my opinion. Their financial positions should ensure they reap the benefits of improving economic prospects, while their low share prices indicate wide margins of safety.

Short-term challenges

News regarding Covid-19 and its impact on the economy could worsen before it improves. A further lockdown in the UK is on the horizon. Likewise, countries across Europe and much of the rest of the world continue to experience disruption from the pandemic.

This is likely to mean more financial pain for WPP and Whitbread. However, they seem to have the financial strength to emerge intact from present economic woes.

For instance, WPP reported £296 million in cost savings in the first half of the year. It expects a quarter of them to be permanent. It has also reduced net debt by £1.5 billion over the past 12 months, which suggests that its balance sheet strength has improved. The company’s total liquidity stands at £4.7 billion. This includes £2.5 billion of cash that should help to sustain its operations through extremely tough trading conditions.

Likewise, Whitbread is making efforts to shore-up its financial position. The hotel operator plans to make up to 6,000 members of staff redundant. This equates to 18% of its workforce. It has also reduced unnecessary expenses and pulled back on capital expenditure to preserve cash. The £1 billion rights issue undertaken by the company should also improve its capacity to still be in business as trading conditions improve.

A long-term recovery

A recovery for WPP, Whitbread and many other companies seems like a distant prospect at the moment. News regarding Covid-19 seems to be getting worse, in terms of case numbers and the prospect of further lockdowns.

In spite of this, current economic weakness is very unlikely to persist over the long run. Covid-19’s impact on the economy, consumer confidence and investment levels is likely to subside. Large-scale stimulus packages that encourage economic growth may help to offset the effects of higher unemployment and tax rises on the future economic recovery.

Therefore, in my view, companies such as WPP and Whitbread have greater investment appeal than their recent share price performances suggest. They are both dominant businesses in their respective industries, and may outlast many smaller peers with weaker balance sheets in the current crisis. This may allow them to improve upon their competitive positions as they shed unnecessary costs to become leaner and more efficient businesses.

Undoubtedly, their share prices could yet fall further in the short run depending on Covid-19’s future path. The pandemic’s ultimate macroeconomic impact is also a ‘known unknown’. But after WPP’s 40% share price decline this year and Whitbread’s 50% stock price slump in 2020, I think they offer turnaround potential on a long-term view.