England’s pubs are set to reopen on 4 July — less than two weeks from now. Shares in leading pub operator JD Wetherspoon (LSE: JDW) have doubled from their March lows, but the Wetherspoons share price is still down by more than 30% this year.
This firm — which is still chaired by founder Tim Martin — has a track record of outperforming the wider pub sector. I think there’s a good chance the shares could be cheap at current levels for buyers with a five-year timeframe.
A top operator
Wetherspoons isn’t universally popular with punters, but there’s no doubt the group’s business model is highly effective. Sales have risen by £1bn since the last recession in 2008. Pre-tax profit has risen from £58m to £102m over the same period — an increase of 75%.
The company attributes its success to providing “good-quality food and drinks, served by well-trained and friendly staff, at reasonable prices”. Staff receive a profit share bonus every year and the average pub manager tenure was more than 12 years in July 2019.
There’s also a culture of continuous small improvements that gradually increase sales per pub. The company says “it intends to utilise a similar approach after reopening”.
A quick return to profitability?
The Wetherspoons profit margins have been consistently ahead of most rivals in recent years. Its share price has outperformed too, doubling since April 2013. The company expects its large pubs and competitive pricing to aid a quick return to normal.
Helpfully, the company has modelled a couple of scenarios for reopening. The firm’s main case is that pub sales will be down by 10% on reopening, and will gradually rise by 2% each month before returning to growth. In this scenario, Wetherspoons expects to be profitable this year, even with a 26% reduction in full-year sales.
This may be too optimistic, but the company says it would expect to be cash flow neutral even if sales are 50% below normal levels. That’s pretty impressive, in my book — I believe it’s better than most rivals can manage.
Wetherspoons share price: buy, sell or hold?
It’s very hard to know how quickly pub trading will return to normal. But I think that the firm’s focus on affordable pricing and high-volume locations will give it an advantage over some rivals.
There are also a couple of other attractions. The firm has more than £1bn of property on its balance sheet, based on 1999 valuations. I’d guess their market values today would be significantly higher.
The Wetherspoons share price also looks quite reasonable to me, based on long-term earnings. Although buyers today have missed the quick rebound that followed the March stock market crash, the current valuation puts the shares on a relatively modest multiple of about 15 times trailing earnings.
If the company can return to growth over the next couple of years — as I expect — then I can see the shares returning to previous highs of 1,500p+ over the next five years. I see Wetherspoons as a decent long-term buy at current levels.
