Geoff Cutmore - Morning Thoughts

Who Buys the Bank's View?

Geoff Cutmore

The Bank of England's financial stability report was vague enough on timing and specifics to avoid being seen as a market call on the financials - but that is how some are reading it.

The report contends that lending banks may be too negative with their write-downs and that ultimately valuations for many securitized debt instruments are too pessimistic. It suggests the market should be prepared for valuations to rise sharply once the current panic over credit availability abate.

Some read this as the central bank telling the market that financials are currently cheap and that it is time to buy. Furthermore, the cash raising done by RBS and HBOS is a validation of that view, establishing a bottom for distress in the sector.

Given, however the report also acknowledges the ongoing problem with finding a 'real' price for these securities, the bank's optimism seems premature. Jon Moulton of Alchemy Partners cast some doubt on the banks ability this morning to judge the situation clearly. He still believes the credit outlook could darken from here. He continues to watch earnings announcements from insurers and other financials for signs of further trouble.

The banks as a whole were not the worst performing sector in April, that prize goes to telecoms and tech. The market is itching to recommit to the banks on attractive valuations - timing however is still the problem. The sector remains vulnerable to bad news. For investors looking for signals to buy - I'm not sure the financial stability report was it!

Whitbread – A Premier business in a tough market.

A consumer stock is always going to find this market hard work. Whitbread has dropped around 12 percent this year, but that number stacks up well against the 17 percent drop for the benchmark FTSE 350 Travel and leisure Index – an index of Whitbread’s competitors. The outlook for consumer spending and property prices is deteriorating rapidly – with the latest survey from the Hometrack team suggesting the biggest fall in UK home prices in 3 years.

Against that backdrop Whitbread has delivered a near doubling of profit on the strength of its Premier Hotels and Costa Coffee units – the 2 businesses that are becoming the group's core brands.

Premier has redefined the budget hotel sector notching up a record year with sales up 15% - its rooms are not the cheapest, but by delivering uniform quality across hundreds of locations the company has built loyal clientele and a streamlined cost model. In a nod to US style business hotels which encourage a satellite group of complimentary businesses around them, Whitbread has tried to locate its own pubs and restaurants nearby to provide a further opportunity to sell additional services to its customers.

We spoke to the cfo this week who confirmed the group's targets for 2008 and its ongoing expansion program.

You may be finding it hard to love consumer cyclical stocks in the UK right now, but Numis and Lehman Brothers both raised their price targets for Whitbread on the back of this week's results so analysts are clearly taking note.

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