A value stock is a company where the share price has fallen below its long-term fair value. It’s not an exact science to find a value stock, as it can be subjective to say where a share price should be in coming years. However, I’ve spotted one company that just hit 52-week lows that I think could be a contender.
Reasons for the fall
The company I’m referring to is JD Wetherspoon (LSE:JDW). It hit lows below 600p yesterday (5 November), putting the stock down 12% over the past year.
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One of the short-term factors at play was the recent UK Budget announcement. The rise in employer national insurance contributions, increase in the living wage and other measures will put up the cost base for the firm. Wetherspoons founder Sir Tim Martin said that the increase to the company would be substantial, with a figure of £60m being used as the potential added annual cost.
Of course, all businesses are impacted by this, but the hospitality sector is seen as one of the most negatively impacted.
Another concern is the debt levels, which rose from £1.06bn last year to £1.07bn in its annual results out last month. With a debt-to-equity level of 2.71, this is well above the figure of 1 that’s what most companies aim for.
Why I think it looks cheap
When you consider the financial results from the past year, it might seem odd that the share price is trading at such low levels. For example, in the latest trading update out today, it showed that sales for the first 14 weeks of the financial year were 5.9% higher than the same period last year.
Aside from a slight fall in hotel room sales, all areas of the business were up. This included bar sales increasing by 5.7%, food by 5.7% and slot machines by 13.5%. This shows a diversified income stream, rather than relying on one area to drive growth.
I also think it looks cheap when I consider the income potential going forward. The business recently reinstated the dividend. At 12p per share, it’s nothing to write home about right now. However, I expect this to increase in coming years in line with financials. So to have the potential to receive more generous dividends based on the current share price looks attractive to me.
Finding the value
I do think that the stock should bounce back over the coming year, based on investors looking past the Budget news and focusing on the core financials. However, I wouldn’t say it’s the best value stock in the index, given that the price-to-earnings ratio at 12.31 is around my fair value target already. Therefore, I’m thinking about allocating a small amount of money here, but not a lot.
