JD Wetherspoon’s share price is rising. Should I buy this reopening stock now?

Pubs in England have reopened and, as a result, JD Wetherspoon’s share price has risen. Edward Sheldon looks at whether he should buy its shares.

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One UK stock that’s had a good run recently is JD Wetherspoon (LSE: JDW), also known as Wetherspoons. Year to date, its share price is up about 25%. Over 12 months, it’s up 44%. Clearly, UK investors see JDW as a good ‘reopening’ stock to buy.

Should I consider this stock for my own portfolio? Let’s take a look at the investment case.

JD Wetherspoon’s share price is climbing

It’s fair to say Wetherspoons has experienced some significant challenges over the last year. As a result of government lockdown measures, it’s been forced to close its pubs. This has had a huge impact on the company’s revenues and profits.

However, the outlook for the company is improving. With the government relaxing lockdowns on 12 April (to a degree), Wetherspoons has been able to partially open some of its pubs. So far, it’s opened around 400 pubs across England that have beer gardens, patios, and rooftop gardens.

Encouragingly, consumer demand appears to be high. Not being able to go for a drink with friends for months, there’s a lot of pent-up demand. Indeed, on reopening day, some Britons queued up for more than two hours to get a drink at Wetherspoon pubs.

Of course, this financial year (ending 26 July) is going to be a write-off. Currently, analysts expect Wetherspoons to generate revenue of just £867m (versus £1.8bn in 2019) and record a net loss of around £90m this year. However, forecasts for the following financial year are much stronger. For FY2022, analysts expect revenue and net profit of £1.8bn and £61m respectively.

It’s worth noting that while Wetherspoons share price has had a good run this year, some analysts believe it can climb higher. Analysts at investment bank Jefferies, for example, raised their share price target for the stock to 1,675p earlier this week. That’s about 20% higher than the current share price.

Should I buy JDW shares? 

While this all sounds promising, I do have some concerns about Wetherspoons shares. One is that it could be a while before the company is firing on all cylinders again. In the short term, it faces a number of restrictions likely to hamper growth.

Another is that analysts are still downgrading their earnings estimates for this financial year and next. In the last month, for example, the consensus earnings per share forecast for FY2021 has fallen from around -46p to -68p. Downward earnings revisions can put pressure on a company’s share price.

A third concern is the debt on the company’s balance sheet. At 24 January, net debt was about £812m. By contrast, total shareholders’ equity was £380.5m. This adds risk to the investment case.

Finally, there’s the company’s dividend track record. Currently, the dividend is suspended. However, before the company suspended its payout, it paid a dividend of 12p per share eight years in a row. In other words, there was no growth in eight years. That’s a bit odd, to my mind. Most top companies regularly increase their payouts to shareholders as profits grow.

Wetherspoons shares: my move now

Weighing everything up, I won’t be buying Wetherspoons shares for my portfolio. The share price could keep rising. However, I think there are better stocks I could buy today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has no position in any shares mentioned. 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.

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