This British Pub Stock Could Rise 33%. How it Can Overcome Covid Fears and Inflation.
The investment case for J.D. Wetherspoon hinges on whether you believe Brits will rekindle their love affair with pubs and return in significant numbers to consume food and drink.
The London-listed group, which owns about 850 pubs and inns, and 60 hotels, is one of the largest behind Stonegate and Mitchells & Butlers , and shares (ticker: JDW.United Kingdom) have suffered from pandemic induced lockdowns. More recently, high inflation has made customers think twice before going out.
Spoons, as it is affectionately known, has issued a string of profit warnings citing rising costs. Fierce competition from grocery stores selling cut price alcohol, and older customers staying home for fear of catching Covid have not helped.
The stock has slumped 51% to 5.51 pounds sterling ($6.49) over the past 12 months, which presents an excellent buying opportunity. The company’s fundamentals that set it apart from rivals—it has a niche selling inexpensive pints of beer in unfussy venues—remain solid. Value conscious consumers are sure to find this approach attractive.
Wetherspoon is also in good shape to weather an inflationary storm. Harishankar Ramamoorthy, an analyst at Deutsche Bank, wrote in a note that if inflation is prolonged, pubs will need to increase prices. “Given its value offering, [Wetherspoon] would have more scope to flex prices, as peers also put through increases at their ends.” He estimates the shares could increase 33% to £7.35.
The business will also benefit from its strategy of owning larger pubs rather than a collection of smaller ones; that will provide savings in rent and labor. For instance, its Royal Victoria Pavilion, in Ramsgate, Kent, can hold about 1,550 customers. Wetherspoon also locked in energy prices with suppliers until 2023, which will reduce its electricity costs.
In the U.K. the number of pubs has shrunk from 61,000 in 1993 to about 46,800 now. Alex Chatterton, an analyst at broker Panmure Gordon, calculates that the number of Wetherspoon pubs during this period has increased to 872 from 67, boosting its market share to 1.9% from 0.1%. “We assume this trend will continue, with smaller operators likely to close first, and JDW likely to continue to take share longer term,” he wrote in a note.
The decline in pub numbers hasn’t hit industry sales. Revenue for the sector has actually risen—growth that has been driven by larger pubs, Wetherspoon’s area of focus. Chatterton found that Wetherspoon in 2018 had about 8% market share in terms of revenue, compared with about 2% market share in terms of the number of pubs. “We continue to believe in the long-term investment case,” he wrote.
The group was founded in 1979 by chairman Tim Martin, who retains about a fifth of the stock. The business has a market value of £696 million and employs around 42,000 workers.
Wetherspoon fetches a multiple of 13.8 times this year’s expected earnings and is valued at a 40% discount to its peers. The company posted a pretax loss of £154.7 million in fiscal 2021, wider than the £34.1 million loss in 2020. It managed 2021 revenue of £772.6 million, well below £1.3 billion in 2020.
As the English writer Samuel Johnson once said, “there is nothing which has yet been contrived by man, by which so much happiness is produced as by a good tavern.” And Wetherspoon is doing its part to make customers happy. Martin told Barron’s in an email that the company has an advantage with its “high level of staff retention and an experienced pub management team—on average pub and kitchen managers have been with the company for more than 10 years.” He added: “Having said that, our motto is that we’re only as good as our next pint or meal.”