FTSE 350 restaurants & pubs: Late opening

The re-rating of leisure stocks in 2012, which was largely a second-half phenomenon, reflected a marked improvement in sentiment towards the consumer as well as appreciation of the successful growth strategies being pursued by many key players. In fact, jubilation at consumer resilience was also evident in the strong performance of other consumer-focused FTSE 350 sectors, such as general retailers.

However, the going may not be so easy for the Great British consumer in 2013. Despite widespread fears in early 2012 about the potential impact of stagnant wages and high inflation, broker Panmure Gordon points out that the 1.5 per cent increase in real household disposable income, as calculated by Longview Economics, was the strongest since 2005. However, Longview expects flat real disposable incomes this year. Along with fears about job security, this is likely to hold back consumer confidence and consequently spending - all of which may leave significant further share price upside looking less likely going forward.

But pub and restaurant companies still have many things going for them. Analysts expect the sector to start the year with a robust round of trading updates following a strong December. This should strengthen the view that the pub and restaurant sub-sector is now operating on a solid footing. And despite last year's strong run, valuations do not look excessive on a long-term view (see table).

*Excludes Mitchells & Butlers and Enterprise Inns

Source: Datastream

There are genuine growth prospects in the sector, too. The growth strategies that companies implemented in the wake of the credit crunch are now well-established and their attractions are increasingly appreciated by the market. For pub companies, focusing on food sales and managed pubs has proved a canny move with solid growth at from Marston's (MARS), Greene King (GNK) and JD Wetherspoon (JDW). Furthermore, broker Numis Securities reckons fewer sporting events and less wet weather (fingers crossed) should be a boost to food-led operators, which also includes Mitchells & Butlers (MAB).

But the sector faces some uncertainty following news that the government will introduce statutory regulation of the beer tie. This is chiefly a concern for Enterprise Inns, which is focused on tied pubs and is regarded by many as being behind its rivals in modernising its tenant agreements.

Outside the pub sector, Whitbread (WTB) continues to see phenomenal growth from Costa Coffee and is hauling up new Premier Inn hotels at an impressive pace. Domino’s Pizza's growth has slackened somewhat but progress still looks impressive and the long-term potential to expand in Germany is exciting. Despite weakness in Europe, catering group Compass (CPG) continues to benefit from a long-term global growth trend as organisations increasingly look to save money and time by outsourcing. The steady self-financed growth long enjoyed by Restaurant Group's (RTN) shareholders also continues with the added excitement of new restaurant formats unveiled last year.

With the improved perception of the sector in general comes the chance that the high level of gearing that's often a characteristic of such companies, especially those with substantial freehold assets, could begin to be viewed as a positive factor once again. The recent five-year revaluation at Marston's, which confirmed reported book value, should help on that front. After all, high gearing levels boost returns to shareholders when a business is moving in the right direction as most of the pub and restaurant companies seem to be doing at the moment.