The Motley Fool

Are these FTSE 250 pub stocks top buys for income and growth?

Can the political views of a company boss influence its share price? You’d think not, but Brexit-voting JD Wetherspoon (LSE: JDW) founder Tim Martin has seen the value of his stock rise by 30% since 23 June.

In contrast, pub group Greene King (LSE: GNK) has a more cautious view on the outlook for Brexit Britain. The firm’s share price is now nearly 10% lower than it was before the referendum.

Both companies issued trading updates today suggesting that conditions remain favourable for pub operators. Should you consider adding a round of Wetherspoon or Greene King stock to your portfolio?

Rising profits

Wetherspoon shares rose by more than 4% this morning, after the pub group’s full-year results showed that like-for-like sales rose by 3.4% last year. That’s well above inflation and suggests that Wetherspoon’s established pubs are trading well.

Pre-tax profit rose by 12.5% to £66m, thanks to lower exceptional costs than last year. Excluding exceptional costs, the group’s adjusted earnings per share rose by a more modest 2.8% to 48.3p. The dividend was left unchanged at 12p.

Investors hoping for further growth will be reassured by Mr Martin’s comments today. He said that Wetherspoon’s sales have risen by 4.1% since 26 July, and penned a lengthy attack on the “lurid” forecasts made by Remain campaigners before the EU referendum.

Interestingly, Wetherspoon’s growth last year came despite the shrinkage of its pub estate. The group closed or sold 41 pubs last year, but only opened 16. Strong sales growth from a shrinking portfolio suggests that the firm is doing a good job of ditching underperforming pubs, but this is coming at a cost. Wetherspoon reported £12.4m of exceptional losses relating to closed pubs in today’s results.

Rising wage and utility costs are also putting pressure on the group’s profits. Wetherspoon’s adjusted operating margin fell to 6.9% last year, down from 7.4% the previous year.

Analysts expect Wetherspoon’s adjusted earnings per share to rise by about 10% this year. With the shares at an all-time high of about 960p, this puts the stock on a forecast P/E of 18.5. In my view the shares look fully priced at current levels. I believe there are likely to be better buying opportunities in the future.

A cheap pint?

While Wetherspoon shares motored higher this morning, Greene King slipped 3% lower after a cautious statement warning of “a reduction in consumer confidence.”

Despite this downbeat view from management, the group’s performance during the first 18 weeks to 4 September hasn’t been too bad. Like-for-like sales rose by 1.7% during the period and the integration of the Spirit pub estate appears to be going well.

Greene King’s share price has lagged the market since the referendum and the stock now trades on 11.6 times 2016/17 forecast earnings. The shares also offer a prospective yield of 4%.

Although I’d want to do some further research before buying, I believe Greene King could be a decent buy at current levels. Forecast earnings growth for next year is similar to that of Wetherspoon, suggesting that Greene King shares could rerate to a higher valuation at some point in the future.

Should investors fear Brexit?

The reality is that it's probably too soon to say how Brexit will affect UK businesses -- and our share portfolios. We may yet see a repeat of June's stock market collapse -- or the market could continue climbing.

To help you navigate this minefield and protect your wealth, the Fool's investment experts have produced Brexit: Your 5-Step Investors' Survival Guide.

This exclusive new report contains details of a simple 5-step process designed to help protect your portfolio from shock losses. It's free and without obligation.

To get your copy, just click here now.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.