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Local lockdowns: are these FTSE 250 pub stocks risky investments?

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The hospitality industry has had a tough year. March’s market crash saw the share prices of the FTSE 250 pub companies J D Wetherspoon (LSE: JDW), Marston’s (LSE: MARS) and Mitchells & Butlers (LSE: MAB) plummet, and all three have barely started to recover.

Britons were excited to return to pubs from July, but local lockdowns, Boris Johnson’s suggestion that the UK is “now seeing a second wave” of Covid-19 and the introduction of a 10pm curfew suggest that a pint might soon be out of the question once again.

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Let’s see if these three FTSE 250 companies are worth the risk.

J D Wetherspoon

J D Wetherspoon’s 52-week low of 559.5p per share came just before each of its 873 sites closed in March. According to its website, 858 of those have currently reopened, but its share price is still well below 1,000p. In September 2019, 1,500p was average.

Despite this, the Eat Out To Help Out scheme and increased outdoor seating areas have helped the FTSE 250 company get back on its feet, while its current ‘Stay Out To Help Out’ initiative is providing a leg up against competitors. 

On top of that, it seems confident in its own long-term growth. Two new J D Wetherspoon pubs have opened since July, the reduction of VAT on food sales in pubs and restaurants to 5% has allowed further price reductions, and various waivers and loans have given increased financial security.

At the moment, J D Wetherspoon seems like it could be the safest FTSE 250 pub stock, and Roland Head agrees that J D Wetherspoon is likely to remain a good long-term investment.  

Marston’s and Mitchells & Butlers

Both Marston’s and Mitchells & Butlers tell a different story. They might both be FTSE 250 companies trading at much lower share prices than this time last year, but I have my doubts.

While Marston’s sale of 168 pubs and its 40% share of a new venture alongside Carlsberg UK (Carlsberg Marston’s Brewing Company) looks good on paper, both are attempts to reduce its rather crippling debt, which sits above £1bn and isn’t covered by cash flow.

Mitchells & Butlers started the year with a 2.6% increase in first quarter LFL sales, but Covid-19 hit the company hard. Like Marston’s, it is in a lot of debt and its earnings aren’t high enough to cover its interest.

While it doesn’t seem like either company will come crashing out of the FTSE 250 or go out of business, they both seem to have less growth potential yet more risk of being hit hard by Covid restrictions than J D Wetherspoon.

The takeaway pint

The 10pm curfew took a similar chunk out of the share price of all three companies, and they’ve all started to recover at similar rates. As such, they remain on equal (in this regard, at least) footing, and so my views haven’t changed.  

While Covid restrictions loom large, all three come with risk.

But different investors have different appetites for risk. While Matthew Dumigan believes that Marston’s is a good post-pandemic buy, I’d still buy J D Wetherspoon. A market crash could allow an exceptionally cheap price to turn into post-lockdown profit, but even without that, it seems like J D Wetherspoon is one of the safest long-term FTSE 250 investments.  

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Dan Peeke has no position in any of the shares mentioned.  The Motley Fool UK has recommended Marston's. 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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