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Jet2 (LSE:JET2) and JD Wetherspoon (LSE:JDW) looks like the kind of value stock investors should be crazy about. Once you see them, they are incredibly cheap.
In both cases, the situation is more complicated than we think. But I think anyone looking for buying opportunities should give both stocks a close look.
Measurements
One of the most important pillars of investing is looking for a margin of safety in case things go wrong. And at today’s prices, that seems pretty easy to find with both Jet2 and JD Wetherspoon.
Jet2 has a market value of £2.28bn. But its latest update reported £2bn of cash on its balance sheet, covering almost all of this immediately.
With JD Wetherspoon, the company has a market value of £750m and another £725m in net debt. This, however, was almost entirely offset by £1.4bn of property, plant and equipment.
That means the stock market isn’t giving these businesses much credit for any money they generate in the future. So, are these possibilities great or too good to be true?
Jet2: cash king?
The catch with Jet2 is that most of the money on the balance sheet is already accounted for. Around £1.3bn is offset by what is known as deferred income.
This represents money that the company has received in the past but has not yet provided the service. In other words, vacations that people have booked but haven’t taken yet.
Deferred income does not show as a liability, so it does not affect the financial position of the company. But they change the value equation for investors and it means it’s not the first profit.
Rising oil prices represent a constant and obvious risk. But I think Jet2’s impressive growth and Gatwick’s new operations, however, mean the stock is worth considering at today’s prices.
JD Wetherspoon: opening price?
With JD Wetherspoon, the opposite may be true. The value of a firm’s assets on its balance sheet can be reduced based on how often it reviews them.
Investors, however, need to consider how realistic it is that the company will sell its assets to unlock its value. Although I think there are more than others, I don’t give you high odds.
That means it depends on the cash flow of the firm. And I’m very optimistic here with that portfolio of great ground leases to contribute to the lowest costs in the industry.
Hospitality has been under pressure from rising costs and this remains a risk. But pubs have been doing amazingly well – and I think JD Wetherspoon is the best in the business.
The possibilities?
A first look at Jet2 and JD Wetherspoon makes them look like investments with huge safety margins. Alas, investing is not that straightforward.
My opinion is that both companies have something in common. They are some of the best performers in industries that have historically been difficult to excel in.
Cost pressures on both airlines and hospitality have been and remain challenging. But in times like these, I think investors would do well to look at other top names.
