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One top FTSE 250 growth stock I’d buy over J D Wetherspoon plc

One school of thought suggests that you should invest in products and services that you use and understand, and as someone who likes value, I don’t mind the odd drink at a Wetherspoon’s pub. The pubs may not be the classiest establishments in town, however the drink prices are incredibly cheap, relative to other pubs’ prices. So does that make shares in J D Wetherspoon (LSE: JDW) a good investment? I’m not so sure.

Strong top line growth

Granted, the pub owner has enjoyed strong top line growth in recent years, with revenue rising from £1,072m in FY2011, to £1,595m last year. That’s a healthy compound annual growth rate (CAGR) of 8.3% per year. However, that growth hasn’t always flowed through to the bottom line, as costs have increased at a faster rate than sales over the last five years. As a result, profitability has fluctuated, and the company has paid the same dividend of 12p per share for the last five years now.

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Today’s preliminary results

Today’s results show that revenue for FY2017 increased to £1,661m, with the company generating like-for-like sales of a respectable 4% for the year. Earnings per share after exceptional items rose from 43.3p to 50.4p but the dividend was held at, you guessed it, 12p. The company noted that it expects a trading outcome for the current financial year “in line with our expectations.”

Valuation

The market appears pleased with today’s results, with the stock up 6% as I write. However, today’s earnings per share figure places J D Wetherspoon on a trailing P/E ratio of 22.1, with a dividend yield of 1.1%, metrics which, given the Brexit uncertainty lingering, don’t offer much value right now in my view. As a comparison, shares in rival Greene King can currently be purchased on a P/E ratio of under 8, with a dividend yield of 5.8%.

A better alternative

However, one stock that does have considerable appeal at present, in my view, is JD Sports Fashion (LSE: JD). After a phenomenal rise in the share price over the last three years, the stock has pulled back a little in recent months, and I believe the pullback may have created a good buying opportunity.

Attitudes towards sportswear have changed dramatically in recent years, with sales of athleisure that can be worn both to the gym and for every day, booming. JD Sports Fashion looks to be a good way to capitalise on the trend.

The company released half-year results on Tuesday, and the numbers were excellent, with revenue surging 41% to £1,367m, profit before tax rising 33% to £103m, and basic earnings per share increasing 36% to 8.1p. Management stated that it remains “confident that we are appropriately positioned to deliver further profitable growth and enhance long term shareholder value.”

JD Sports Fashion has enjoyed explosive growth in sales over the last five years, with the top line rising from £1,060m to £2,379m (CAGR 18%), and the momentum is expected to continue, with analysts forecasting revenue growth of 20% this year, along with a 16% rise in earnings. The consensus FY2018 earnings figure of 22.1p places JD Sports Fashion on a forward P/E of 16.7, which looks attractive in my view, given the company’s growth record.

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Edward Sheldon owns shares in Greene King. 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.

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