With pub chain J D Wetherspoon (LSE: JDW) due to announce its first-half results tomorrow, I continue to see this as an attractive time to buy the shares for my portfolio. Here are three reasons why I think the J D Wetherspoon share price offers me good value right now.
1. Balance of risks with opportunities
Over the past couple of years, a lot of the discussion when it comes to Wetherspoon has been about some of the risks it faces. I think it is important to remember these as they are indeed significant. Cost increases could eat into profit margins. Labour shortages might push up staffing costs. Meanwhile, the demand outlook for the pub sector remains unclear. Wetherspoon has a lot of older patrons. Some of them may no longer feel comfortable drinking in a crowded pub.
But while these risks are real, I think they are more than priced into the J D Wetherspoon share price. The shares have crashed 42% over the past year and have more than halved since before the pandemic.
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But it has a proven business model honed over decades. It is pioneering new ways of involving frontline staff in managing the business, including having some of them on the board of directors. With its proven model and innovative approach to a changing market, I see a lot of opportunities for the firm. For example, its hotel business could see strong demand due to the rise in popularity of local holidays. I think investors pushing the J D Wetherspoon share price down may have been focusing on the risks to the pub market without giving the firm enough credit for its position in that market.
2. The pub chain has a large property portfolio
With a market capitalisation of just under £1bn, it may come as a surprise that the company has £1.1bn on its balance sheet of freehold and long leasehold property alone.
Interestingly, the properties have not been revalued since 1999. That suggests Wetherspoon may not be in a hurry to revalue them any time soon. But, given the boom in commercial property prices over the past 20 years, it also makes me wonder whether the real value of the company’s property portfolio is substantially higher than the value at which it is carried on the balance sheet.
If that is the case, I see this as helping the investment case. It could help support the share price in the long term.
3. The share price and mass market exposure
Until the pandemic, Wetherspoon had been profitable for every year of its life as a listed company. Aside from being forced by the government to close during lockdowns, the pub chain has seen resilient customer demand.
An economic downturn can hurt revenues and profits at many companies, but even in a recession, people want to go to the pub. With its large market size, fairly resilient long-term demand and a decline in competition due to some pubs going to the wall recently, I think the company is well-positioned to benefit from its broad exposure to the British economy. With pent-up demand likely to benefit sales in the next couple of years, I think that could help boost trading at the company.
