Shares in JD Wetherspoon (LSE:JDW) have had a miserable couple of years. The company’s share price has gone from 1,694p in 2019 to 768p today. I don’t anticipate a return to previous highs any time soon either. But I do think that JD Wetherspoon stock might be a good investment at these levels. Here’s why.
The business
COVID-19 restrictions hit the business hard. In order to survive, the company has had to take on almost twice as much debt as it had in 2019 and increase its share count by about 25%. I think that the impact of each of this will last for some time.
Before the pandemic, the company was paying out around £26.5m annually in interest on its debt. Its most recent filing indicates that it now pays around £65.5m. So even if it manages to get back to producing £132m in operating income — as it did before lockdown restrictions — around 50% of that is going to go on paying interest on its debt, compared to 20% before.
The debt is significant because it means that there’s going to be less net income left over for investors. And the increased share count means that what net income there is will have to be divided between more shares. That extra 25% more shares reduces the claim that each share has on the net income produced by the business by 25% too. Investors today therefore have a reduced claim on a smaller earnings pot.
For this reason, I don’t foresee shares returning to 1,694p in the near future. But at 768p today, I don’t think that the JD Wetherspoon share price needs to recover its previous high to be a good investment. The question for me is how the investment equation looks at today’s prices.
The investment equation
Buying shares in JD Wetherspoon would involve me paying a price equivalent to just over £1bn. Factoring in the debt (around £1.4bn) and cash (£45.4m), this gives an enterprise value of £2.4bn. If the company can recover its operating earnings of around £132m per year, that represents a business return of around 5.5%. From an investment perspective, I don’t think that’s at all bad.
Furthermore, there are also has some important intangible assets that make the investment proposition more attractive in my view. I believe that JD Wetherspoon has a strong brand. Its pubs offer a consistent product up and down and country and its prices are competitive. Customers know what they’re going to get and they believe that it will be good value. In this regard, I think that the company has similar characteristics to Greggs, Starbucks, and McDonald’s.
The biggest risk, as I see it, is that the return to its pre-pandemic profit levels might not happen. The fact that some of its pubs have had to close indicates to me that this is a real possibility. But this doesn’t worry me too much. For one thing, the declining number of pubs pre-dates the pandemic. Between 2015 and 2018, the number of pubs fell, but revenues and operating profits rose. This leads me to think that the numbers issue is not, by itself, a huge problem.
Conclusion
I think that JD Wetherspoon has shown itself to be a resilient business. At current prices, I’m seriously considering buying shares for my portfolio.
