At the start of 2023, the J D Wetherspoon (LSE:JDW) share price was £4.52. Fast forward to today and shares in the FTSE 250 pub chain are trading at £6.89 per share.
That’s a 52.45% increase. I still think the stock is a bargain at the moment, but if the price keeps rising, it won’t be for much longer.
A business in trouble?
A 52% increase since the start of the year prompts two questions. Is the company 52% better than it was in January? And if not, was it undervalued then, or is it overalued now?
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To my mind, the stock was clearly undervalued back in January. And I think it’s still cheap at the moment, but it’s becoming less and less obviously so as the price goes up.
The company’s balance sheet suffered heavily during the pandemic, as profits turned to losses. Debt increased significantly, as did the number of shares outstanding.
On the face of it, this looks like a business in a desperate situation. The company took on debt and with no money coming in, had to increase its share count to service this.
I suspect this is why the stock was at £4.52 at the start of the year. But I also think the business is in a better state than this – and the share price is rising as investors find this out.
Recovery
The idea that the company’s debt was taken on to make ends meet during the pandemic is mistaken. For one thing, a lot of its borrowing happened before the lockdowns began.
The cash raised was used to fund investments in pubs and freehold reversions. Both of these should provide returns over time, by boosting the company’s revenues and margins.
Furthermore, a significant amount of the company’s debt is fixed at an interest rate of 1.24% until 2031. That gives the business a significant amount of time before it becomes an urgent issue.
I think the business is going to struggle to get back to the 92p per share in free cash it was generating before the pandemic. But 70p per share looks plausible to me.
At £4.52 per share, that’s a return of around 15% per year. This is why I think the price in January looks like a bargain.
At today’s prices, 70p per share represents a 10% return. I still see this as attractive, but the rising price means that the equation is getting worse.
A bargain going fast
I’ve been using my spare cash lately to buy bank shares. But if I had any available, I’d be looking seriously at J D Wetherspoon as a great investment prospect.
I see the stock is one of the best buys in the FTSE 250 right now. But as investors realise the company is in better shape than it seemed a few months ago, it’s unlikely to stay that way for long.
