There’s one thing that makes me suspect a stock’s decline might be over. It’s when a company reveals its biggest ever loss, and the price rises. That’s what happened to JD Wetherspoon (LSE: JDW) Friday, as it revealed a loss of £155m in the year ended 25 July. The share price? It gained 2.5% by early afternoon.
Results for the year to 25 July showed a 38% fall in like-for-like sales, with revenue down 39%. And that’s compared to a year that had already been blighted by the pandemic. The pre-tax loss of £155m, excluding exceptional items, is almost five times the equivalent figure of £34.1m from a year previously.
Losses per share, again before exceptionals, quadrupled to 110p. And it was no surprise to learn that there will again be no dividend.
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Wetherspoon ended the year with net debt of £846m, up from £817m a year previously. That is around 60% of the company’s market cap. At least lenders have waived their covenants for another year. And the company had year-end liquidity of £240m.
JDW share price volatility
JDW shares have been on a strange trajectory so far in 2021, recovering strongly to a peak in April, but then falling all the way back again. Over the past 12 months, we’re looking at a 28% gain, thanks to a late 2020 spike. But over two years, taking in the pandemic period, the JD Wetherspoon share price is down 30%.
I have eyed up JD Wetherspoon more than once in the past. Could it provide a safe home for some of my retirement fund now? However the recent price chart looks, I’m only interested in the longer-term picture. And over the past five years, Wetherspoon has gained 13.5%. That looks like a significant underperformance compared to the FTSE 250, up 29% in the same timescale.
I think JDW shares got a bit overheated towards the end of 2019. It became the kind of stock that captures everyone’s imagination but is pushed a bit too high. Towards the end of that year, the JD Wetherspoon share price reached a trailing price-to-earnings multiple of 22.5.
Valuation a bit too high?
Now, that’s not a massive growth stock valuation by any means. But can an operator in such a highly competitive sector really justify a valuation that’s around 50% higher than its index’s long-term average? Especially when it’s paying dividends of only around 1%? I do think it was overvalued at the time.
On the current share price, though, things look different. Based on the same 2019 earnings per share figure, the P/E multiple comes down to 14. That seems like a more reasonable level to me. But wait, that old EPS figure is history now, so how can it have any validity? Well, with the current turmoil the only thing I can do is guess that Wetherspoon should be able to get back to 2019 levels of profit.
I’m convinced it can, even if perhaps not in the 2021-22 year. So will I buy? I do see a positive outlook for the JD Wetherspoon share price. But I’m sticking with my rule of not investing in companies carrying big debt.
