This FTSE 250 share looks badly undervalued to me!

Christopher Ruane explains why a FTSE 250 share that’s a household name looks like an ongoing bargain to him even after jumping 30% in the past year.

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There are some real bargains hiding in plain sight in the FTSE 100 right now, I reckon. But I think the same is also true in the secondary index. One FTSE 250 share I own looks noticeably undervalued to me right now.

If I had spare cash to invest, I would be happy to snap up more for my portfolio.

Contracting market

One odd thing about the company’s market – and perhaps a risk that has contributed to its own current valuation – is that it is shrinking.

The total number of its sites has been in heavy decline and I expect it to continue falling in years to come.

So why do I think the FTSE 250 share merits a place in my portfolio given that context?

The company in question is J D Wetherspoon (LSE: JDW). Over decades it has honed a business model of selling beer at cheap prices, crowding its pubs and also building a large food business alongside the drinks. It also makes money from slot machines as well as accommodation at some premises.

The company’s keen prices and tight cost control mean that, in my opinion, it can survive and indeed thrive at a time when many rival boozers shut their doors.

That could give Wetherspoon the advantage to broaden its customer base even in a declining market, simply by attracting more punters to its existing pubs.

Interim results due soon

The City has certainly been paying attention. Over the past year, the stock has soared 30%.

But that growth has stuttered more recently. The shares have drifted down around 10% since the second half of January.

Could that be due to uncertainty about the firm’s interim results, due to be published on 22 March?

I do not see why. In a trading update in January, the company said it expected the year to deliver in line with analysts’ expectations.

At that point, it also said that like-for-like sales in the first 25 weeks of its financial year showed double-digit percentage growth compared to the same period of the prior year.

Potentially great value

There have been risks in recent years that could yet trip the business up, such as cost inflation and tighter household budgets meaning some people prefer to drink at home than in pubs.

But the proven business model continues to deliver.

Last year saw record sales and the company is on track to beat that performance comfortably this year. After tripling pre-tax profits last time, I think Wetherspoon could further improve its bottom line as it benefits from strong sales, lower inflation and the effects of large spending over recent years in upgrading its estate.

Yet sells for less than half its price before the pandemic!

Its market capitalisation is under a billion pounds, less than the £1.4bn net book value of the company’s property, plant and equipment (though it did end last year with £641m of net debt).

That valuation looks much lower to me than such a strong, growing business merits.

I reckon Wetherspoon is still a potential bargain for my portfolio at the current share price.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has positions in J D Wetherspoon Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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