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It’s not just drinks Wetherspoons (LSE:JDW) cheap; after plunging lower today (March 20), so did the pub operator’s shares.
At 550p per share, Wetherspoons’ share price is now down to a one-year low. This means its forward price-to-earnings (P/E) ratio remains at 12.9 times, well below the 10-year average of 19-20.
Does this represent a high buying dip opportunity? Or investors should avoid it FTSE 250 a company like a watered-down pint of Stella?
What’s going on?
Like the wider hospitality industry, JD Wetherspoon is suffering from ballooning labor and energy costs. It disrupted the market in January when it said “higher than expected” costs meant first-half profits would fall year-on-year, driving the share price lower.
Sales continued to rise well, up 5.7% in the six months to February, to £1.1bn. On a like-for-like basis, revenue rose 4.8%. However, the good work of attracting punters through the door continues to be undone by the rising costs.
Operating expenses rose by £28m year-on-year in the first quarter, while repairs rose by £10m and business level by £9m. As a result, operating profit fell to £52.9m, down 18.4% on the previous year.
Throughout the year, Wetherspoons Chairman Tim Martin said increasing pressure on consumers’ wallets, combined with higher energy, labor costs and tax, “a result of earnings slightly below current market expectations“.
The pressure is rising
The concern for investors isn’t just that costs are rising, either. Wetherspoons is taking care of the biggest debts, 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 loans “it will bite even more as interest rates jump from pre-pandemic levels and the likely high inflation scenario points to a prolonged pause in interest rate cuts.“.
There are also questions to be asked about whether takeovers at Wetherspoons will continue to rise despite popular low prices. With inflationary pressures weighing on consumer spending, and the UK economy stuck in a low-growth environment, will people drink and eat less when they’re in the pub or take fewer trips out?
Are Wetherspoons shares to buy?
The good news is that Wetherspoons can benefit greatly from drinkers from more expensive areas. It’s still outperforming the wider market, and may continue with cash-strapped Brits changing their habits.
But that’s not enough to motivate me to invest. eToro analyst Mark Crouch notes that “Rising wages, higher business rates and energy costs are clearly eroding margins, and these pressures are unlikely to abate in the near term.“. Unfortunately,
Wetherspoons shares could be falling. But I think I have found the best stocks to buy in the current climate.
