Will the Wetherspoons share price soar as pubs reopen?

The Wetherspoons share price is up, but Roland Head isn’t buying. He explains why he thinks this reopening stock is more expensive than it looks.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The sun is out, the pubs are open, and under-50s are now eligible for Covid-19 vaccines. Is it time to start buying pub stocks such as JD Wetherspoon (LSE: JDW)? Investors seem to think so. The Wetherspoons share price has risen by more than 30% already this year.

Shares in the chain, which has 872 pubs in the UK, have risen by 44% over the last 12 months. I expect Wetherspoon’s business to make a strong recovery, but can the stock keep rising? I’m not so sure.

Watered-down profits

It’s too soon to know how well Wetherspoon’s pubs are trading. But I think it’s fair to say that many people will be happy to be able to go to the pub again.

However, as a potential shareholder I’m concerned about the impact of Wetherspoon’s fundraising activities over the last year. In total, the company has raised £235m of fresh cash by selling 24m new shares. These deals were done when Wetherspoon’s share price was much lower, so buyers who picked up new shares are sitting on attractive profits today.

Raising funds in times of difficulty is never ideal, but I think it was necessary. The extra cash has allowed the company to stay afloat during lockdown and make the changes needed to reopen.

However, these fundraisings will have longer-lasting consequences for shareholders. The total number of Wetherspoons shares in issue has risen from 105m to 129m over the last year. This means that one share today represents a smaller stake in the business than it did one year ago.

Mind the gap!

These extra shares mean that even if Wetherspoon’s profits return to pre-pandemic levels, earnings per share will still be lower. For example, in 2019. Wetherspoons reported a net profit of £72.8m and earnings of 69p per share. I estimate that if the company generated the same profit today, earnings per share would be just 56p. This fall in comparable earnings is what I mean by minding the gap.

Don’t get me wrong — I think Wetherspoons is a well-run business with a strong future. I’d be happy to own the shares, but only at the right price. I’m not sure the price is right for me today.

Wetherspoons share price: good value?

Why does dilution matter? It reduces the price I’m prepared to pay for Wetherspoon’s shares. Here’s a quick example.

The pub chain’s market cap today (the value of all its shares) is about £1.8bn. In late December 2019, ‘Spoon’s market cap was also £1.8bn. However, the share price as I write is 1,375p. In late December 2019, Wetherspoon’s share price was trading at about 1,700p.

This tells me that even though today’s share price is lower, the business is valued at the same level as it was before the pandemic. Given that Wetherspoon’s share price hit an all-time high in 2019, I think it’s fair to say that a full recovery is already priced into the stock.

For this reason, I won’t be buying Wetherspoon’s shares at current levels. I think I’ve left it too late, so I’ll hope for a better opportunity in the future.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »