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Its not just the drinks at Wetherspoons (LSE:JDW) that are dirt cheap; after plunging today (20 March), so are the pub operator’s shares.
At 550p per share, the Wetherspoons share price is now languishing at one-year lows. This means its forward price-to-earnings (P/E) ratio sits at 12.9 times, well below the 10-year average of 19-20.
Does this represent a top dip buying opportunity? Or should investors avoid the FTSE 250 company like a watered-down pint of Stella?
What’s happened?
Like the broader leisure industry, JD Wetherspoon is suffering from ballooning labour and energy costs. It spooked the market in January when it said “higher than anticipated” costs meant first-half profits would fall year on year, sending its share price lower. Investors have been even less than forgiving following its latest warning today.
Sales have continued ticking nicely higher, up 5.7% in the six months to February, to £1.1bn. On a like-for-like basis revenues were up 4.8%. However, the good work in attracting punters through the door continues to be undone by a range of increasing expenses.
Operating costs rose £28m year on year in the first half, while repairs rose by £10m and business rates by £9m. As a consequence, operating profit tumbled to £52.9m, an 18.4% decline from a year earlier.
For the full year, Wetherspoons Chair Tim Martin said rising pressure on consumer wallets, combined with higher energy, labour and tax-related expenses, could “result in profits that are slightly below current market expectations“.
Pressure rising
The worry for investors isn’t just that costs are rising, either. Wetherspoons is nursing enormous amounts of debt, which rose to £772.9m in February from £724.3m last July.
This is especially concerning given recent developments in the Middle East. As analyst Dan Lane of Robinhood notes, these debts “will bite more now that interest rates have jumped since pre-pandemic levels and a potentially higher inflation environment points to a prolonged pause in interest rate cuts“.
There’s also questions to be asked as to whether Wetherspoons takings will continue rising despite the pub’s famously low prices. With inflationary pressures crimping consumer spending, and the UK economy stuck in low-growth mode, will people drink and eat less when they’re at the pub or take fewer trips out?
Are Wetherspoons shares a buy?
The good news is that Wetherspoons could well benefit from drinkers switching down from more expensive pubs. It’s still outperforming the broader market, and may continue it cash-strapped Brits change their habits.
But that isn’t enough to encourage me to invest. eToro analyst Mark Crouch comments that “wage increases, higher business rates and energy expenses are clearly eroding margins, and these pressures are unlikely to ease in the near term“. Unfortunately,
Wetherspoons shares might be cheap. But I think I’ve found far better value stocks to buy in the current climate.
