Why would any investor pick a pub operator like Marston’s (LSE: MARS) as a stock to buy when the price has been on the floor?
One reason is that the trading update released on 11 October 2023 suggests the company’s turnaround plans are beginning to work.
There’s a fair chance the recovery of the enterprise may continue. And Marston’s could thrive if the well-known tsunami of cost and economic pressures eases.
If that happens, we could see recovery in the stock. However, it is near its lows as I write.
Positive outcomes are never certain. However, the fallen share price is a chance for investors to look deeper into the business now before committing to the stock.
A traumatised sector
The dwindling number of pub outlets nationally helps to reduce competition in the sector. And that looks like an opportunity for slick operators to attract customers.
There’s no doubt that trading conditions have been brutal for pubs. But economies of scale can help big chains like JD Wetherspoon and Marston’s to survive and thrive.
And the management teams of bigger organisations can step back from day-to-day operations to guide the strategic moves of their businesses – that’s a big advantage over small, owner-run pub enterprises.
JD Wetherspoon’s turnaround is going well, for example, and this is reflected in its share price chart.
I’m optimistic that Marston’s stock can recover too.
Nevertheless, things have been tough for the business. And the directors have been working on a turnaround plan for some time.
The update mentions a double-digit sales increase for the trading year to 30 September 2023. However, general inflation of prices will likely account for at least some of that.
City analysts have pencilled in a decline in earnings of around 60% for the year just ended. But they expect a bounce-back near 27% for the current 12-month period.
Meanwhile, the directors said customer demand “remains encouraging”. And the company has fixed its energy costs and a “significant proportion” of food and drink expenses for the current year.
On top of that, simplification of the business structure and axing the head office staff numbers looks set to deliver annual savings of around £5m.
The improvements may help the business achieve its profit estimates. And the directors have a “high degree of confidence” for the current year.
Aiming to reduce debts
One of the risks to consider is the company’s big pile of borrowings shown on the balance sheet. The directors are focusing on debt-reduction and making some progress.
The update explains that loans are mostly long-dated and asset-backed. And 93% of the borrowings are hedged and not at risk from any changes in interest rates during the coming year.
Looking ahead, chief executive Andrew Andrea pointed to an improving outlook. Cost headwinds are reducing. And Andrea thinks Marston’s is well-placed to “outperform” in the current macroeconomic environment.
There’s risk here, for sure. But with the share price near 28p, the forward-looking earnings multiple is around four for the current year. That looks low, but that rating must be considered alongside the debt pile.
Overall, I think Marston’s is worth deeper research now. And I’m watching it to see if the turnaround gathers pace.
