With Boris Johnson giving pubs the go-ahead to reopen their doors on 4 July, now’s the perfect time to buy a pub stock like Marston’s (LSE: MARS), right?
I’m not so sure. Before explaining why, let’s look at today’s interim results from the company — originally intended for release in mid-May.
Revenue hit
Of course, a lot of this morning’s numbers won’t really matter all that much since they only reflect trading in the 26 weeks to 28 March – not long after the UK went into lockdown.
Nevertheless, at £510.5m, revenue was almost 8% down compared to the same period in the previous year. Underlying pre-tax profit was even worse, tumbling almost 72% to just £9.4m. This was despite sales to the end of February being “broadly in line” with the previous year.
To its credit, the company has done what it can to minimise the impact of the lockdown on its finances. Expenditure has been slashed and 93% of its staff have been furloughed, with the remainder taking a 20% hit to their salaries. It’s also made use of government grants and reliefs where possible.
Taking all this into account, what are the arguments in favour of taking a stake now?
Glass half full
First, it seems at least some UK drinkers are desperate for pubs to reopen. As a result, the idea that revenues may bounce back seem logical. Whether this happens in practice is something entirely different, of course.
Second, the recently-announced deal to combine its brewing business with Carlsberg UK should allow management more time to focus on its pubs and accommodation.
It’s also good for its finances. Assuming the deal goes through, Marston’s will have a 40% stake in the new company. It will also receive a cash payment of £273m, which can be used to reduce debt.
Third, it’s worth highlighting, as Marston’s did today, that its pub estate is mostly freehold and located outside city centres. The fact that nine out of 10 of these pubs have outside space could prove very important as drinkers adapt to the new ‘normal’.
Last, it’s certainly possible the company could actually grow market share as more competitors go out of business.
Glass half empty
On the other hand, there are some solid reasons for continuing to give Marston’s a wide berth for now. Another round of the coronavirus can’t be ruled out. And while a second lockdown seems unlikely, this would be a nightmare for an already-wounded industry.
Even if a second wave is avoided, the psychological impact of the virus could prove a drag on earnings for a while.
In addition to all this, you have a number of more general issues facing the pub industry. These include rising costs and the fact that an increasing number of us, particularly young people, are choosing to ditch alcohol completely.
The great unknown
As investors, we’re told to be “greedy when others are fearful.” As profitable this strategy has been for investing legend Warren Buffett, I’m not feeling the urge to snap up Marston’s right now. Even if the share price is still roughly 50% below where it was at the start of 2020.
With such an uncertain outlook — and no dividends to tide investors over — this is one for the watchlist at best.
For me, there are far less risky ways of making money in the market.
