Over the last 12 months, the Marston’s (LSE:MARS) share price has seen some attractive growth of over 40%, almost making a complete recovery to pre-pandemic levels. But recently, this momentum seems to have died down, and the stock has since begun to drop. So is this a sign of trouble ahead? Or is now a fantastic time for me to add this business to my portfolio? Let’s take a look.
The Marston’s share price: a buying opportunity?
I’ve previously explored this business. But as a quick reminder, Marston’s is an owner and operator of UK pubs. Knowing that, it’s unsurprising to see that its share price collapsed in 2020 following the introduction of lockdown restrictions. Since the last time I looked at it, Marston’s has released its half-year report. And all things considered, the results are not too bad, in my opinion.
At first glance, it looks like the last six months of trading have been a disaster. Compared to the same period a year before, revenues fell from £343m to £55m while the underlying bottom line slipped from £7.6m to -£105.9m. However, it is essential to note that these results cover October 2020 to April 2021. And given lockdown restrictions in the UK didn’t start until March 2020, the comparisons between these figures and a year before (October 2019 to April 2020) are pretty meaningless in my eyes.
Having said that, seeing a significant decline in revenues is frustrating. And the four-week extension of lockdown restrictions here in the UK certainly doesn’t help matters. But it seems that the source of this weakened performance is almost entirely being driven by the pandemic rather than any underlying problem with the business. And since the vaccine rollout is progressing relatively quickly, the disruptions from the pandemic are ultimately a short-term problem. So assuming that Marston’s can survive the remainder of the storm, I believe its share price can continue to recover and grow over the long term – making the recent fall look like a buying opportunity in my eyes.
The dangers that lie ahead
An eventual recovery of the Marston’s share price may be on the horizon. However, the business has got quite a few headaches to address that might impede or even outright prevent that from happening. Most notable is its damaged financial health. Operating pubs is a capital-intensive process even when they remain closed. And so, the business has had to burn through quite a bit of cash as well as secure waivers on its loan covenants just to stay afloat. The latter is often a serious red flag in my eyes.
In addition, the management team recently completed the disposal of the Beer Company from its business portfolio that helped raise an additional £228m of capital. This large surge in cash did enable it to pay down some of its debts and improve its financial position. But, as this is ultimately a one-time source of capital, should the company need to raise more money in the future, it will have to find another way of doing it.
But with all that in mind, I do believe the pent-up consumer demand to enjoy a pint will allow Marston’s financial health to improve, taking its share price with it. I would still consider adding this business to my portfolio.
