The JD Wetherspoon (LSE:JDW) share price is 47% lower than it was five years ago. But some strong growth in the underlying business makes this a stock investors should take a look at.
In its latest trading update, the company announced record total sales. Combined with a long-term competitive advantage, this makes an attractive investment proposition.
Growth
Wetherspoons doesn’t (currently) pay a dividend to its shareholders. Instead, it reinvests the cash it generates to grow its business – and the most recent evidence indicates this strategy’s working.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
The company just announced 5.5% growth in like-for-like sales over the last month and total revenues reached record levels. With household budgets under pressure, there’s no question this is impressive.
Even more impressive though, is the fact the business achieved this while reducing its pub count. This should translate into lower costs, meaning wider margins and better profitability.
All of this is borne out in sales per pub being 21% higher than they were before the Covid-19 pandemic. There’s no way around it – Wetherspoons is a company in growth mode.
Competitive advantage
Profitable growth is great, but the most important thing for investors is a durable advantage over competitors. And it has this in the form of lower costs than the rest of the industry.
There are two main sources of this advantage. First, Wetherspoons’ scale allows it to buy in volume – it buys almost the entire production of Ruddles and gets a good deal from Greene King for doing so.
Second, it owns the majority of its pubs outright. This is more capital-intensive at first, but it brings down costs over the long term by reducing lease payments.
This allows Wetherspoons to undercut competitors on pricing without operating at a loss. And that’s an extremely powerful position that should help the company gain market share over the long term.
Inflation
With a company like this, I’m not hugely worried about competitive risks. Maybe I’m wrong, but I don’t think any other pub chain has the capacity to undercut the company on pricing.
The bigger risks, in my view, come from things like inflation. Owning its pubs is key to the company’s low-cost approach, but it makes the business more susceptible to the effects of rising costs.
Inflation’s been falling in the UK lately and has reached the Bank of England’s 2% target. But the chances of it picking up again at some point are relatively high.
There are clearly pros and cons to the company’s approach. Over time, I think it’s likely to generate good rewards for shareholders, but it’s not a risk-free strategy.
I’m buying
JD Wetherspoon has nothing to do with artificial intelligence (AI). But its shares are trading at an attractive price, the company’s growing impressively, and has a long-term competitive advantage.
That’s good enough for me – I own the stock and I intend to keep adding to my investment both now and in the future. It might take a while, but I think there’s good value on offer right now.
