It may be easier to toast JD Wetherspoon (LSE: JDW) as a punter than an investor. That is because the JD Wetherspoon share price has more than halved over the past 12 months.
As a Spoons shareholder, that dismal performance concerns me. But I think it could also present me with a buying opportunity to top up my position the next time I have spare funds to invest. Here is why.
Valuing businesses
The foundation of a good business is long-term customer demand. On that front I think Spoons is well-positioned. People will want a place to socialise for decades to come. For many it may be the boozer. Higher beer prices and health concerns could dent demand for pubs, but I think by offering non-alcoholic drinks and food, the business will be able to ride that trend.
Next, a firm needs some competitive advantage that can set it apart from rivals. That gives it (in some cases) pricing power, which can help profits. In this regard, Wetherspoon sacrifices pricing power for pulling power as its pricing is extremely competitive. But it also has central locations, longer opening hours and a wide range of cheaper ales and food to help it stand apart. Walk into almost any branch even early in the day and it tends to be doing good business.
Finally, a business needs to convert its popularity into profits. It can do that by keeping debt low and managing costs properly. Here I have a concern about the firm’s net debt. It stood at £892m at the end of July, which is larger than the chain’s current market capitalisation of £597m. Servicing and paying down that debt could be a drag on profitability for years to come.
Roll out the barrel
After a very difficult time during lockdowns, the company’s financial performance has been recovering.
Revenues last year were within 5% of pre-pandemic 2019 levels. The company reported an operating profit once more and, after exceptional items, a £146m post-tax loss the previous year turned to a £19m profit this time around. That all suggests that the pub chain’s business has been moving in the right direction.
Like-for-like sales in the first nine weeks of the firm’s current financial year grew by double-digits compared to the same period in the prior year.
I think the JD Wetherspoon share price looks cheap
But while the business performance has been improving strongly, the share price has been moving the other way.
I think that reflects risks such as the company’s debt burden eating into profits and soaring costs hurting margins. With its focus on value for money, Spoons may struggle to pass on price increases fully to patrons without losing some sales.
However, I feel the underlying business is very attractive. It was profitable for decades and I believe it can return to a strong financial performance in years to come.
Given all that, the current JD Wetherspoon share price looks cheap to me. Using 2019 earnings, the current price-to-earnings ratio is just six. The company has almost got back to 2019 levels of revenue – if it can do the same with earnings, today’s price could turn out to be a bargain for my portfolio.
