Are JD Wetherspoon’s shares poised to benefit from the Covid recovery?
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There can be no doubt an economic recovery will come, once Covid vaccines are fully rolled out to the most vulnerable groups. JD Wetherspoon (LSE: JDW) shares could be well positioned to rise in that situation, I feel.
I much prefer them to the more indebted Marston’s, which has recently seen a bidder walk away from a takeover.
Why Wetherspoons’ shares could recover
The pub group, founded and still run by vocal Brexiteer Tim Martin, has been able to raise money from shareholders on several occasions. This has helped it through the pandemic to date. The most recent raising was for £93.7m. Last year, it raised £141m.
The latest cash will help strengthen the balance sheet. Bullishly, the group has also said it wants to buy attractively-priced properties. Management thinks this will help it emerge stronger from the pandemic.
On the downside, the pandemic has pushed up debts, net debt including bank borrowings and finance leases was £836m in April 2020. In the latest annual report, the company also said the year-end net-debt-to-EBITDA ratio was 9.48 times, compared to 3.36 times in 2019.
But it does have cash available and I expect the profit and loss to look much stronger once sales lift again.
Experienced management team
I think another thing going for the business is that the managers are very experienced and have seen plenty of ups and downs in the economy. Tim Martin has been chairman since 1983. His CEO John Hutson has been on the board since 1996, and his finance director since 2014. This strikes me as a positive sign that the management team is committed, know their industry and work well together.
They probably think longer term, especially with the founder still at the helm and being the largest shareholder in the group.
My best guess is that once the pandemic subsides and we learn to live with it, Wetherspoons will return to being a profitable, cash generative business, although there’s no guarantee that social life will go back to what it was. The firm is currently a much more indebted business than I would like too, but this is beyond its control. Also, if Martin sells down his holding in the group in the future that could spook investors and push down the share price. So there are a few issues facing the pub group.
Another share that could bounce back
Rank Group (LSE: RNK) the owner of Mecca bingo and Grosvenor Casinos is another leisure business that has felt the impact of lockdowns. The pandemic has not been kind to the share price, which had been rising before the stock market tumbled in March 2020.
The group operates in the UK and Spain and so the vaccine rollout in the former may help the shares in the not-too-distant future. Especially if vulnerable groups can return to bingo halls.
The group also has proprietary technology, which I think is currently not something most investors are aware of. It has a commercial partnership with Bauer to use the platform. Growth in this area could possibly boost the shares in the future. But I’ll also be keeping an eye out for increased debt as a result of sites being closed, as this may drag on returns for years to come.
Andy Ross 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.