The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE 250 pub chain in April.

| More on:
Person holding magnifying glass over important document, reading the small print

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I’ve thought J.D. Wetherspoon (LSE:JDW) shares looked like a bargain for some time. And the market has largely agreed with me – the FTSE 250 stock is up around 68% since the start of 2023.

The company released its interim trading update last month and the share price has fallen by 7%. I think the update is a more complicated one than it first seems, though, so it’s worth a closer look.

Headlines

At first sight, J.D. Wetherspoon’s latest trading update is a bit of a mixed bag. Revenues increased by around 8%, with higher like-for-like sales offset by an overall reduction in the number of pubs.

Expanding margins meant that operating income roughly doubled, going from £37.4m to £72m. But the picture with net profits is much less clear.

At face value, earnings per share fell from 29p to 14.7p. That looks like a disaster and might explain the share price decline, but I don’t think there’s a big problem for shareholders here.

In setting out its update, Wetherspoon’s distinguishes between its results before “separately disclosed items” and after. Understanding this distinction is key.

Separately disclosed items

Before separately disclosed items, Wetherspoon’s profits look pretty good – earnings per share increased from 1.1p to 19.6p. But a 4.9p per share loss on these items weighed on the final results.

Investors therefore need to figure out how much of a problem these separately disclosed items are. And the first order of business with this is to find out what they are. 

Separately disclosed items include a recorded loss on the disposal of some of its pubs, a property impairment charge, and a charge for a shift in the value of interest rate swaps. So are these significant?

I don’t think so – in general, these are non-cash charges and I don’t anticipate them recurring. So while they aren’t entirely inconsequential, they don’t materially affect the core of the business.

Free cash (out)flow

One potentially more alarming number is the free cash flow figure. That was negative, implying the company sent out more cash than it brought in during the period. 

Wetherspoon’s sent out £6m in cash, compared to an inflow of £166m during the same period a year ago. That’s also worth a closer look, but I don’t think it’s a huge issue.

The main reason for the outflow was a £48m payment to suppliers, reducing the amount the firm owed. By itself, I don’t see this as a huge issue, but the business financed this by taking on debt.

With interest rates high, that’s worth investors keeping an eye on. Wetherspoon’s borrowings are hedged with interest rate swaps, but an increasing debt pile is always a risk.

A stock I’m buying

J.D. Wetherspoon is a complicated business beneath the surface, but it’s important to not lose sight of the big picture. To buy its shares is to invest in a certain type of business model.

Above all, the company is known for its low prices and consistent standards. This is a strategy that I think can endure and provide good returns for investors. 

Despite the falling share price, nothing in the firm’s latest results indicates to me this is a mistake. So I’m going to continue buying the stock for my portfolio in April.

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.

Stephen Wright 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.

More on Investing Articles

Young Caucasian woman holding up four fingers
Investing Articles

7%+ dividend yields! 4 FTSE 100 shares for investors to consider buying in April

These FTSE shares offer dividend yields comfortably above the index average of 3.7%. Here's why they could be good passive…

Read more »

Dividend Shares

£10k in an ISA? Here’s how to generate a ton of passive income

Passive income can provide a lot more financial freedom and security. Here’s an easy way to generate some within an…

Read more »

Investing Articles

The Aviva dividend yield’s already over 7%. Could it go higher?

Christopher Ruane explains why he thinks the Aviva dividend could be on course to grow this year and beyond. Might…

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

2 shares I’d buy to try and double my money in 10 years

Stephen Wright thinks there are still opportunities to to buy UK shares that can double in value over the next…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

NIO stock has crashed! Here’s why I still wouldn’t touch it with a bargepole

I've been watching NIO stock falling heavily, and wondering when might be a good time to get in cheaply. Here's…

Read more »

Investing Articles

Why have Rolls-Royce shares fallen this week?

Rolls-Royce shares remain the best performing on the FTSE 100 over the past year, but there's been some pullback. Dr…

Read more »

Investing Articles

With a 4.3% yield, I consider this FTSE company an exceptional investment

Oliver Rodzianko say this FTSE company is focused on quality and long-term survival. As such, he thinks he'll hold it…

Read more »

Investing Articles

How I’d invest £10,000 in a Stocks & Shares ISA and aim for a £45,500 second income

Millions of us aren’t earning the second income we deserve. Here, Dr James Fox explains how he’d get his savings…

Read more »