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Drinking in the New Year

Tales of pub and restaurant closures continue to abound, but for most of the big listed players 2011 will actually be a year of expansion. Aside from the heavily indebted pub companies - Enterprise Inns and Punch Taverns - all the major players have growth plans. So, while 2010 was relatively uneventful in share price terms, it may yet turn out tohave been an important transition period between debt management and growth.

Some of the sector's current growth stories are attracting more attention than others, and 2011 could shape up to be a year when individual company performance takes precedence over wider sector trends. Although government austerity measures could yet turn expansion plans on their heads, the consensus view is that a repeat of post-credit crunch trading is unlikely. Against that backdrop, we'd expect those companies showing the strongest progress in executing their growth strategies to perform best - Marston's is an early favourite on this front.

Strong brand identity, essential in the recession, is also likely to remain important. One of the reasons that FTSE 350 companies anticipate growth is that they have survived at the expense of small independent operators, thanks to their ability to source ingredients more effectively and offer innovative promotions. From this perspective Mitchells & Butlers' expansion plans could attract attention. Until now, the group has been embroiled in boardroom scuffles and a £500m disposal programme, but it is regarded by many as one of the best pub operators in the business and will now focus on expanding its leading brands, such as Harvester.

Rising costs are another issue. However, the average spend per head at many big chains is low, so cost increases will measured in pence rather than pounds and operators hope customers will be able to overlook such price rises. Value-for-money specialist JD Wetherspoon may be well placed from this perspective. The group's shares have taken a battering recently, though, due to City fears that the departure of the finance director may signal that margin will be sacrificed in pursuit of growth.

Should austerity-related fears increase, however, then investors may well huddle around the industry's most solid performers. These include Greene King, which boasts a good mix of pub concepts and is also progressing with expansion plans. Meanwhile, Restaurant Group, which owns Frankie & Benny's and Garfunkel's, continues to prosper thanks its strong brands and locations in high footfall venues such as leisure centres and airports. It also continues to fund new openings with its strong cash flows.

But the heavily indebted pub groups, Punch and Enterprise, represent an entirely different proposition. The issues here remain the long process of paying down debt and the stabilisation of underlying trading. Potentially, investors may start to get a better picture during 2011 regarding just what will be left over for them when the dust settles. The situation at Punch looks particularly interesting given speculation that it may default on securitised debt, leaving it in control of unencumbered pub assets.

NAMEPRICE (p)MARKET CAP (£m)PE RATIOYIELD (%)1 YEAR PRICE CHANGE (%)LAST IC VIEW
COMPASS GROUP5741084116.13.123.7
DOMINO'S PIZZA58694338.51.591.9
ENTERPRISE INNS1226164.70.021.8
GREENE KING47510288.54.612.7
MARSTON'S11263711.25.222.9
MITCHELLS & BUTLERS361147712.10.044.6
PUNCH TAVERNS774925.30.04.9
RESTAURANT GROUP280558162.439.8
WETHERSPOON (JD)44962312.92.74.3
WHITBREAD1856327916.72.133.1

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