FTSE 250 stocks have taken a harder battering in this market crash than their bigger FTSE 100 brethren. Closing at a new crash low midweek, the top index was down 31.4% from its pre-crash level of 21 February. The FTSE 250 was down 40.3%.
The falls of some individual mid-caps have been truly stupendous. JD Wetherspoon (LSE: JDW) has plummeted 61%, WH Smith (LSE: SMWH) 69%, and National Express (LSE: NEX) a whopping 79%. However, I continue to believe buying these stocks through this slump will deliver handsome rewards for long-term investors. Here’s why.
It’s undeniable these three stocks are spectacularly cheap when valued on multiples of their last year’s earnings.
At a current share price of 550p, JDW trades at 7.1 times its 2019 earnings per share (EPS) of 77.2p. For SMWH, at 600p, the multiple is 5.2 on EPS of 115.7p. And for NEX, at 100p, it’s 2.9 on EPS of 34.5p.
It’s certainly true these businesses won’t be delivering EPS at those levels this year. But I’m confident they’re capable of doing so again in a normalised, post-coronavirus-pandemic world. This could be as early as 2021 or 2022.
Survival is the priority for businesses this year. I’d say the market is pricing JDW, SMWH and NEX as not much above basket cases. I think it’s a huge overreaction.
At their last financial year-ends, the three companies had reasonable levels of debt, unused borrowing facilities, and net debt-to-EBITDA ratios for their industries: WH Smith (0.9x), National Express (2.4x), and JD Wetherspoon (3.4x).
Of course, even healthy balance sheets come under some pressure through down phases of the economic cycle — let alone in acute and extraordinary circumstances many are facing today.
In a trading update last week, WH Smith emphasised it’s “a resilient business with a strong balance sheet, substantial cash liquidity and strong cashflow.” I expect to hear similar news from JD Wetherspoon in a trading statement scheduled for tomorrow.
Meanwhile, National Express updated the market today. I found the statement highly encouraging on the matter of liquidity.
The company said: “Our balance sheet is strong and we have borrowing headroom of around £500m.” It added that it’s “in advanced discussions with our banking group to secure additional short-term facilities as further security should market conditions worsen.” And that “the UK Government’s announcement of secured loan guarantees provides further assistance here.”
While NEX, SMWH and JDW are facing unprecedented pressures on their businesses in the near term, the government’s response has been equally unprecedented. Companies in the retail, hospitality and leisure sectors will pay no business rates whatsoever for 12 months.
Meanwhile, chancellor Rishi Sunak has said: “Any business who needs access to cash will be able to access a government-backed loan, on attractive terms. If demand is greater than the initial £330bn I’m making… I will go further and provide as much capacity as required.”
Indeed, the government has pledged to deliver “whatever it takes” to keep companies and people solvent.
This backstop — which may or may not be needed by NEX, SMWH and JDW — only adds to my conviction that these three FTSE 250 stocks could prove to be great buys for long-term investors.
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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended WH Smith. 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.