Are these locked-down UK shares too cheap to ignore?

The Greggs share price is down by 45% so far this year. Wetherspoons isn’t far behind. Is it time to start buying these battered UK shares?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Times are tough for companies that depend on people eating and drinking while they’re out and about. The two UK shares I’m looking at today represent businesses I’ve admired for years. Yet both companies have lost more than 40% of their value so far this year. Given this, I’ve been taking a closer look to find out if these shares are now too cheap to ignore.

Sales could bounce back in 2021

Pub stocks have been among the worst performing UK shares this year. Today’s full-year results from pub chain JD Wetherspoon (LSE: JDW) show us the extent of the damage.

Known to its customers as Wetherspoons, its sales fell by 30% to £1,262m last year, pushing the group to a pre-tax loss of £34.1m. Impressively, this is the company’s first loss since 1984.

The company says that since reopening, like-for-like sales have been 15% below the same period last year. Sales were said to be stronger during the first few weeks, but have slowed since the 10pm curfew and rule of six came into force.

Today’s results also include more clues about how difficult this year has been for pub operators. The interest costs on Wetherspoons’ debt were only covered 0.3 times by its underlying operating profit, down from 3.9 times in 2019. This implies that the company isn’t making enough money even to service its debts — a worrying situation.

At the same time, the group’s borrowings have risen. Year-end net debt was £817m, up from £737m last year. To provide short-term funding and reduce the risk of debt-related problems, Wetherspoons raised £141m in a share placing in April.

Is it a buy? Wetherspoons is expected to return to profitability next year. The latest analysts’ forecasts suggest the group could generate earnings of about 27p, pricing the stock at around 36 times forecast earnings. To put this in context, earnings in 2019 were 75.5p per share.

If pub operators can return to normal by next summer, then I think Wetherspoons could be cheap at current levels. But with the risk of a second lockdown on the horizon, this is far from certain. I’d rate JDW shares as a speculative buy, at best.

This UK share has doubled in six years

Like Wetherspoons, sausage roll maker Greggs (LSE: GRG) was seen as one of the best operators in the food sector before the pandemic.

Between 2010 and 2019 Greggs’ pre-tax profit rose by 118%, from £52.4m to £114.2m. But the firm is expected to report a full-year loss of nearly £50m this year, while profits in 2021 are expected to be around half 2019 levels.

One problem is that Greggs’ business depends on people being visiting shops, offices and travel locations. We just don’t know how long it will be until this kind of activity returns to historic levels.

Management says that since shops reopened, sales have running at around 75% of the level seen during the same period last year. That’s better than I expected, but lower sales will hit profits hard.

What I’d do with Greggs shares: Even after this year’s share price crash, Greggs’ share price is still double the level seen in November 2014. Are they really cheap? I’m not convinced.

At a last-seen share price of 1,300p, Greggs shares trade on 14 times 2019 earnings and a chunky 28 times 2021 forecast earnings. I think that’s high enough, for now. Much as I admire this business, I’d rate this UK share as a hold.

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.

Roland Head has no position in any of the shares 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.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »