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Is the falling JD Wetherspoon share price a bargain?

A man with Down's syndrome serves a customer a pint of beer in a pub.
A man with Down's syndrome serves a customer a pint of beer in a pub.

As an investor, I look for bargains. That means buying into high-quality companies when they are trading at what I regard as an attractive price. That was my rationale for investing in pub operator JD Wetherspoon (LSE: JDW). But, so far, it has been a lousy investment. The JD Wetherspoon share price has more than halved in the past year.

The company fell further in this morning’s trading. It is around 7% down on the day, as I write this on Wednesday morning.

Trading update

The reason for today’s fall is a trading update the company released this morning. In it, Wetherspoon said like-for-like sales in the first 14 weeks of its financial year rose 9.6% compared to the same period last year. Not only that, they were higher than the pre-pandemic 14 weeks ended 3 November 2019. The increase was only 0.4%, but I think it is encouraging to see sales return to those pre-pandemic levels.

I see the improving sales performance as a sign that the pub chain has put pandemic-era challenges behind it and is back to business-as-usual. There is a risk that sales could slow though, as people increasingly have less disposable income. The statement noted that October was “a slightly slower month”.

Challenges for profitability

If sales are recovering though, why did the market react negatively to the trading statement?

I think the concern many investors have is not around top line revenues. Instead, they are worried about bottom line profits. Inflation is affecting the company, which said that it now faces “substantially higher” costs. Higher labour, food and repair expenses could eat into the profitability of a company whose labour-intensive business model involves serving food and drinks in an estate of hundreds of aging pubs.

Overall, it seems Wetherspoon’s business is getting closer to normal, at least in terms of bringing punters through the doors. Now it needs to work on controlling costs to help it improve profitability. That could be a challenge though. While the massive pub group should benefit from economies of scale, many costs like food are largely outside its control.

The company expects to generate a positive cash flow again this financial year. That builds on last year’s return to positive cash flow.

The share price attracts me

Wetherspoon still has a lot of work to do to return to its former levels of profitability. In 2019, it made £73m in post-tax profit. Last year, it was back in the black, but at the much lower level of £19m after tax.

But does that justify the collapse in the JD Wetherspoon share price? I do not think so. Its business model is proven, and I am encouraged by the robust sales figures. Customer demand has returned at scale and in an environment of high inflation, I think the firm’s proven ability to run a lean operation could help its economics.

I continue to own a stake in the company. I see its current share price as a bargain given the proven strength of the Wetherspoon business model and its popularity with customers. If I had spare money to invest, I would act on the JD Wetherspoon share price and increase my stake.

The post Is the falling JD Wetherspoon share price a bargain? appeared first on The Motley Fool UK.

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C Ruane has positions in JD Wetherspoon. 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.

Motley Fool UK 2022