Why this FTSE 250 growth champion could double your money

Rupert Hargreaves looks at one FTSE 250 (INDEXFTSE: MCX) growth stock he believes is only just getting started.

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The last time I covered JD Wetherspoon (LSE: JDW) I concluded that the City’s outlook for the group was too pessimistic. With earnings growth of just 1.8% for 2018 projected at the time, analysts didn’t seem to be expecting much from the group, which has come to dominate the UK high street. 

However, as the year has progressed, analysts have become more positive on the outlook for the company — no doubt helped by its better than expected trading performance. 

Sales growth 

Helped by England’s performance in the World Cup, and the fantastic summer weather we’ve been having, today Spoon’s reported a 5.2% rise in same-store sales for the 10 weeks to July 8. 

As analysts plug these figures into their valuation models, it looks as if the company could see substantial growth upgrades in the weeks and months ahead. Prior to today, the City had already upgraded its full-year EPS growth target to 6.9% for 2018. 

No matter what you think of its Brexit-loving boss Tim Martin, he is managing to successfully steer the group through a tough trading environment. Rising costs are eating away at the pub industry’s margins and at the same time, economists are becoming increasingly concerned about the health of the UK consumer’s wallet.

And while the industry has benefited from hot weather over the summer, and the World Cup over the past few months, we still don’t know what’s going to happen throughout the rest of the year.

Cautious outlook 

For its part, the company has adopted a cautious stance. As well as toasting its summer sales growth, Tim Martin also warned today that the group will be facing “considerable cost increases next year, in areas including business rates, the sugar tax, utility taxes and wages.

For investors, this warning will come as no surprise. Martin has a reputation for underpromising and overdelivering. He issued a similar warning in 2015, 2016, 2017 and at the beginning of this year. On every single occasion, the business has been able to mitigate rising costs by streamlining or through improved sales figures. 

For example, to help offset cost pressures, the group is buying freeholds and renovating existing sites to attract new customers. It has also introduced new menu offerings such as pizza and a mobile app so customers can order drinks (as well as food) without having to go to the bar. 

Fail to prepare, prepare to fail

I believe Martin’s continual cautious outlook has helped Spoon’s stay ahead of the competition, and as long as the business tries to improve continually, growth should follow. 

Indeed, growing EPS have helped push the shares higher by 100% over the past two years.

The group has enjoyed steadily rising earnings over the past five years, with EPS up from 46.2p in 2013 to 70.8p last year. Analysts expect EPS of 75.2p by 2019. 

Even though I’m positive on the outlook for the shares, the one thing that concerns me is the P/E multiple of 16.5. This is higher than I’d like personally, but I’d be willing to make an exception here because of the firm’s widely recognisable brand, innovative nature and history of growth. In fact, I believe there’s a strong chance the shares could go on to double again over the next few years.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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