Shares in pub company JD Wetherspoon (LSE: JDW) have fallen by around 7% today after it released a disappointing trading update. Although like-for-like (LFL) sales during the company’s second quarter increased by 3.3% and total sales by 6.3%, rising costs resulting from increases in the starting rates for hourly-paid staff caused margins to fall by 1.1% at the operating level.
As a result of this decline in operating margins, Wetherspoon expects profit for the full year to be towards the lower end of analysts’ expectations. Looking ahead, there’s likely to be further pressure on operating margins as the full impact of the UK’s move towards a living wage causes staff costs to rise, with the prospect of all of the additional costs being passed on to customers being relatively slim.
With the company’s shares trading on a price-to-earnings (P/E) ratio of 13.3, they appear to offer good value for money. However, with the scope for further downgrades to forecasts over the coming months, now doesn’t appear to be the right time to buy a slice of Wetherspoon.
Cocktail shakers
Of course, Wetherspoon is a UK-focused business and the uncertain outlook for the economy is a key reason why other UK-focused stocks are seeing their share prices come under pressure. Not only is the impact of the living wage likely to raise costs for a number of businesses, the “cocktail” of potential problems facing the UK economy (as highlighted recently by the Chancellor) is likely to cause investor sentiment in other companies that rely upon the UK for a significant proportion of their income to worsen.
That’s a key reason why shares in Santander (LSE: BNC) and Barratt (LSE: BDEV) are down today. Although Santander is a relatively well-diversified bank, its reliance on the UK has increased due to poor economic performance in another key market, Brazil. And with the UK’s outlook being relatively uncertain, Santander’s shares have fallen by 38% in the last six months.
Looking ahead, Santander is forecast to increase its bottom line by 5% in the current year. While that figure could be downgraded if the macroeconomic outlook worsens, Santander’s P/E ratio of 7.4 indicates that its margin of safety is sufficiently wide to merit investment at the present time.
Reasonable price
Similarly, Barratt trades on a P/E ratio of only 10.5 right now and with the Bank of England unlikely to increase interest rates for a number months, demand for housing could remain relatively robust in 2016 and beyond.
Furthermore, with there being a chronic undersupply of housing in the UK, the long-term outlook for the industry remains relatively appealing. With Barratt being expected to grow its bottom line by 18% this year, its price-to-earnings growth (PEG) ratio of 0.6 indicates that such growth is on offer at a very reasonable price.
