J D Wetherspoon (LSE:JDW) released its interim earnings report today — the results look good and the share price is up accordingly.
The number that jumps off the page is free cash flow of £166m, or £1.32 per share. For a company with a share price of around £6, that’s an awful lot.
So is the stock a bargain at the moment, or is there more to this than meets the eye? I think the answer is: ‘both’.
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Earnings
Let’s start with that free cash flow number. If the company is likely to make £1.32 per share in free cash every six months (or even every year) then the stock could be a steal at £6.
This is highly unlikely, though. The free cash flow number for the past six months is buttressed by the sale of some interest rate swaps, which have been protecting the business against rising rates.
The sale netted J D Wetherspoon around £169m. In other words, it accounts for pretty much all of the company’s free cash flow.
The gain is real and it gives the business much more cash on its balance sheet. But it isn’t something to reckon with when figuring out what the business might look like in the future.
That’s not to say the report wasn’t encouraging, though. Revenues, operating profits, and earnings per share were all higher than they were during the same period 12 months ago.
Debt – one of the most obvious risks with the stock at the moment – was also down significantly. And the company continued to invest significantly in new pubs and freehold purchases.
Overall, I think this is an encouraging report that shows that J D Wetherspoon is moving in the right direction. But it’s important to be clear on what is part of the ongoing story and what isn’t.
A stock to buy?
I’ve thought that shares in J D Wetherspoon were undervalued for some time now, but I haven’t bought the stock yet. With the share price up 38% since the start of the year, have I missed my chance?
There’s no question that I’d have done better if I’d bought the stock back in January. But I still think there’s a decent case to be made for buying shares at today’s prices.
While the gains from the sale of interest rate swaps aren’t likely to be repeated, there are also expenses that are the same. The company has been investing heavily in its pubs recently.
Over the last six months, J D Wetherspoon has spent around £19m on new pubs and freehold reversions. Since 2020, that number stands at £179m.
There are two things to note here. The first is that these investments are likely to be one-off costs and therefore won’t be weighing on cash flows in the future.
The second is that I expect these to make the company more efficient. That’s why I think that the stock is good value even after the recent run-up in the share price.
