J D Wetherspoon is no ordinary pub company.
The pub is one of the great British institutions, but in recent years it has come under attack from the smoking ban, some heavy tax rises, the recession and increased competition from some supermarkets who think nothing of selling alcohol as a loss-leader. Not to mention that the recent proposal to reduce the drink drive limit to less than one pint seems to be deliberately designed to destroy the rural pub trade.
The result is that more than 50 British pubs are shutting up shop every week and if this continues at the same rate there won't be any pubs left by 2030.
So you might be forgiven for thinking that pubs are a declining industry with no investment opportunities. However, one company, J D Wetherspoon (LSE: JDW), is clearly bucking this trend by continuing to open more pubs whilst rewarding its shareholders with record profits.
Wetherspoon's most recent half-yearly results showed a 40% increase in earnings per share profits and that it had increased its estate from 731 pubs to 746 (your correspondent has visited a fair few of them).
A Very Distinctive Pub Company
A common criticism of the British high street is that, thanks to the chains' use of standardised fronts and identikit shops, everywhere looks the same. If you were dropped into the middle of a McDonald's or Pizza Hut and couldn't see the menu you'd probably be hard pressed to tell what country you were in, never mind the town or city.
Wetherspoon bucks this trend; its town centre pubs are specifically designed to retain a significant part of the character of the original building. For example, one of its three pubs in Exeter, George's Meeting House, used to be a chapel and most of the chapel's interior design was incorporated into the pub.
So whilst every Wetherspoon pub offers the same range of meals and uses the same style of lettering upon its notice boards, each one is significantly different from Wetherspoon's other pubs. The variation shown between each of Wetherspoon's pubs is in stark contrast to the clone pubs operated by some other chains.
Fighting Back
Whereas many companies have soft management who will happily sit back and take whatever the government dishes out without complaint, Wetherspoon is not afraid hitting back. Chairman Tim Martin recently commented in The War on Pubs that "…this government is to common sense what Tiger Woods is to monogamy"; also remarking that the police's policy of trying to trick pubs into selling alcohol to under-18s is nothing more than entrapment and would be illegal in virtually all other walks of life.
Martin continued this line of attack in Wetherspoon's latest report by pointing out that the company generates more jobs and taxes selling alcohol than the supermarkets. However, Wetherspoon's has some way to go to meet the standard set by Andrew Perloff at property company Panther Securities (LSE: PNS) whose annual reports are legendary for some truly withering critiques of our governing class and the damage that they inflict upon the economy.
The Numbers
J.D. Wetherspoon's results for the last five years are as follows
| Year | 2009 | 2008 | 2007 | 2006 | 2005 |
|---|
| Total Sales (£ millions) | 955 | 908 | 889 | 848 | 810 |
| Basic earnings per share | 32.6p | 27.6p | 28.1p | 24.1p | 16.9p |
| Dividend per share | 0p | 12.0p | 12.0p | 4.7p | 4.28p |
Wetherspoon axed its dividend in 2009 in response to the recession in order to conserve cash and pay off some debt.
Wetherspoon's half-yearly results were published last Friday and they made cheerful reading for shareholders. Earnings per share increased by 40% to 17.5p and the company reinstated its dividend, paying 12p per share and a one-off special dividend of 7p.
Based on today's share price of around 525p if this performance were repeated for the rest of 2009-10 this puts the shares on a PE ratio of 15, yielding 2.3%, which is a fair price given Wetherspoon's track record.
If you're the type of investor who prefers to see a lot of hard assets in the accounts then you'll be disappointed with Wetherspoon. It has assets of £877 million, compared to £695 million of liabilities of which £409 million is short-term debt, making its net asset value 131p per share.
Wetherspoon's debt has recently been refinanced with a syndicate of 11 banks offering a four-year deal and it was very encouraging that the refinancing was heavily oversubscribed.
The Future
There's plenty of scope for future growth, perhaps at the expense of Wetherspoon's troubled competitors like Enterprise Inns (LSE: ETR), Mitchells & Butlers (LSE: MAB), and Punch Taverns (LSE: PUB). As some Campaign For Real Ale members keep reminding me, Enterprise and Punch should really be thought of as property companies which happen to own pubs.
Wetherspoon's pubs open much earlier than most others, selling some 275,000 breakfasts every week, and it was recently announced that the pubs would soon start opening at 7am. This should capture yet more of the breakfast trade and means that Wetherspoon is now in direct competition with coffee shops such as Starbucks, restaurants and even take-away outlets.
Wetherspoon has recently moved into the hotel business and operates some 16 hotels in England, Scotland and Wales. It will be interesting to see if they can replicate their formula in this field.
More from Tony Luckett:
> Tony doesn't own shares in any of the companies mentioned in this article but is a regular customer of J D Wetherspoon.
