The uncertainty of the past couple of years has made it a challenging time for pub operators like JD Wetherspoon (LSE: JDW). The company’s share price slid more than 5% in today’s trading, at the time of writing this today. Over the past year, the shares are down 21%. The JD Wetherspoon share price is now less than half where it was at the end of 2019, before the pandemic.
Is this a buying opportunity for my portfolio?
Wetherspoon bull case
I remain a fan of how Wetherspoon runs its business. The company has a proven formula. Although it attracts critics, it has proven to be highly successful. Keen pricing, conveniently sited locations, and an engaged workforce have helped Wetherspoon build a popular, resilient business. In 2019, the company reported earnings per share of 71p. If it could get back to that level, the prospective price-to-earnings ratio at the current JD Wetherspoon share price would be slightly less than 12. That looks cheap to me.
The company has managed to turn its popularity with customers into an economically lucrative model. Economies of scale allow it to secure good pricing from suppliers. Many pubgoers are regulars. Increasing their loyalty through initiatives such as the Wetherspoon News magazine allows the company to encourage repeat custom.
Wetherspoon bear case
Pubs are still reeling from previous lockdowns. A number of Wetherspoons’ patrons are old and feel nervous about going into a crowded pub. That was already putting a dampener on the company’s recovery even before the latest threat of more restrictions. In a statement today, the pub chain warned that its first half may be lossmaking or only marginally profitable. The company pointed out that uncertainty and government policy shifts “make predictions for sales and profits hazardous”.
The company waved off concerns about possible supply chain problems and staff shortages. But even that apparently good news could turn out to be another risk. Products like beer have a shelf life. If pubs are forced to close for long, the company may end up having to throw away stock. That will hurt profits. The company has already tapped the market in a rights issue to improve liquidity during the pandemic, diluting shareholders. There is a risk that could happen again if a reduction in trading hurts liquidity.
Recovery prospects for the JD Wetherspoon share price
I remain persuaded by the JD Wetherspoon strategy and its track record of business success. Nonetheless, the bear case is starting to look more compelling to me than it did before. If further lockdowns come, the pub company may end up taking years to recover. There is a risk that demand will never fully recover as some patrons will not return to pubs. Meanwhile, liquidity could shrink.
The battered JD Wetherspoon share price already factors in many of the risks, in my view. So positive news next year could see the share price move up again. But I don’t think we’ll see the 2019 share price again in 2022. There is simply too much uncertainty about prospects for the hospitality sector.
I do think buying now and being willing to hold for years in anticipation of recovery could end up being a lucrative strategy for my portfolio. I’d happily consider doing that.
