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This FTSE 250 company presents a buying opportunity but with added risk

Jabran Khan
Two hands holding champagne glasses toasting each other with Paris in the background

Share prices in restaurants, pubs, cinema chains, and entertainment venues are taking a huge hit at the moment. The coronavirus pandemic has seen to that with a government lockdown of such venues. 

In a market where variety and choice is key, established chains do fare better. Despite the pandemic causing closures and plummeting share prices there are some cheap stocks to be picked up, but with a risk. There is no indication as to when exactly such venues will be allowed to be re-open.

One popular name on the pub scene is that of JD Wetherspoons (LSE:JDW). The group, famously shortened to ‘Spoons’ by its loyal patrons, operates close to 900 locations across the country. 

It has become another victim to Covid-19 and containment measures enforced by the government. Prior to last Friday’s announcement of all pubs and restaurants closing, Wetherspoons CEO Tim Martin vowed to keep all his locations open. The often outspoken pub boss said, “My instinct is that closure won’t save lives but will cost thousands of jobs and create unsustainable costs for the UK.” He also did not rule out job losses across his 43,000-strong workforce. 

It’s ale good

Just last week, Wetherspoons released half-year results to 26 January. Despite the current closures, the results were mightily impressive. 

Revenue was up a healthy 4.9% compared to the same period in 2019, with a 5% increase in like-for-like sales. Pre-tax profit saw a huge 15.2% hike while cash flow also saw a positive increase. 

Since the start of its financial year, Wetherspoons has opened one new pub and sold five others. Originally the plan was to open a further 10 to 15 pubs. Also in the year to date, £57m has been spent buying freehold reversions of 18 pubs where Wetherspoons was the tenant. Since 2014, a total of £320m has been spent on reversions. Although some of these plans will be halted, its record to invest and move away from leased premises is a positive sign for me.

The bigger pitcher

Before the market crash and closures, Wetherspoons was on an upward trajectory. The past month has seen approximately 60% wiped off its share price. The full year prior to this, excluding the market crash, saw a healthy increase of approximately 20%. 

Year on year, profit levels have been increasing, which is always a good indicator of performance. There has been a 60% total increase between 2015 and 2019 figures. Additionally, dividend per share has remained consistent for over four years. The current price-to-earnings ratio sits at 12. 

From an investment perspective, shares are cheap to pick up in this profitable pub group, however, I would be inclined to keep an eye on current events before investing heavily. We do not know when government advice will change and allow pubs, clubs, and restaurants to reopen. If the tide does turn and there are indications that we will return to being able to drink in one of these establishments, then a punt on Wetherspoons shares may not be a bad shout. As they say in vampire movies, ‘..the thirst always wins.’

The post This FTSE 250 company presents a buying opportunity but with added risk appeared first on The Motley Fool UK.

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Jabran Khan 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 2020