Is J D Wetherspoon a bargain FTSE 250 stock today?

This Fool considers one instantly recognisable FTSE 250 stock to see if it might warrant a place in his portfolio right now.

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A man with Down's syndrome serves a customer a pint of beer in a pub.

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J D Wetherspoon (LSE: JDW) strikes me as a business that will survive the UK’s hollowed-out high streets and decline of the pub trade. Therefore, I find this FTSE 250 stock an interesting potential investment.

This feeling was strengthened the other day when I walked into a packed ‘Spoons’ pub. There were students sitting not far from the retired while a hen party was getting under way. Numerous families were eating.

This diverse group of punters were all there for the cheap food and drink. Clearly, it’s a unique British business loved by millions.

Wetherspoons’ shares are down 41% over the past five years despite nearly doubling from a December 2022 low.

So, should I invest? Let’s take a look.

Back in the black

Like most companies across the hospitality industry, Wetherspoons suffered during the pandemic. Indeed, in 2020 the firm reported its first annual loss since 1984.

However, for its last financial year (which ended 30 July), it reported a pre-tax profit of almost £43m on sales of £1.92bn. That was a 12.7% rise in annual sales on a like-for-like basis.

Then, in a trading update covering the 25 weeks to 21 January, like-for-like sales rose another 10.1%. Bar sales increased by 11.8%, food was up 7.9%, and fruit machines jumped 10.4%. Meanwhile, hotel room sales edged up 3.1%.

This all bodes well for the interim results due out tomorrow (22 March).

Some concerns

Despite this progress, rising labour costs and competition from supermarkets remain ongoing issues for me here.

The price of a pint in a supermarket is about £1, so a 10% increase in labour costs (which are around 10p per pint) necessitates a 1p increase in the selling price to cover costs. However, for pubs, the average selling price of a pint is around £4.50. The labour per pint is therefore around £1.35, necessitating a 13.5p increase in the selling price to cover extra costs.”

Wetherspoon chairman Tim Martin, January 2024

Chairman Tim Martin has also highlighted that pubs pay far higher VAT and business rates than supermarkets. For example, pubs and restaurants pay 20% VAT on food sales, whereas “supermarkets pay almost nothing”.

The tax generated by Wetherspoons between 2014 and 2023 equates to approximately 25 times the company’s post-tax profits.

In April, the national minimum and living wages are going up. And if elected, Labour has promised to “introduce a genuine living wage for all adult workers”. That sounds like higher staffing costs to me.

Will I order in some shares?

Of course, Wetherspoons is a resilient and trusted brand with loyal customers. And with inflation easing and profits gradually being rebuilt following the pandemic, it wouldn’t surprise me if the share price headed higher than 785p.

Over time, I expect the firm to naturally take market share with more UK pubs set to vanish. Perhaps it could even one day surpass 2019’s pre-tax profit of £102m.

However, I worry about long-term growth and there’s no dividend. Meanwhile, the shares are trading at a forward price-to-earnings (P/E) ratio of around 19. That doesn’t seem like an immediate bargain to me.

Indeed, it’s basically the same as global spirits giant Diageo (19.3) and bakery chain Greggs (20). Despite also facing higher costs right now, I’d rather buy either of those two stocks.

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.

Ben McPoland has positions in Diageo Plc and Greggs Plc. The Motley Fool UK has recommended Diageo Plc and Greggs Plc. 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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