It’s trebles all round for shareholders in pub chain J D Wetherspoon (LSE: JDW). That is because J D Wetherspoon shares have soared 73% this year, giving shareholders like myself cause to raise a glass to the company’s performance.
Despite that jump, I think even now they still offer good value relative to the company’s long-term prospects.
Looking to the future
I reckon the key to understanding what J D Wetherspoon shares are worth is taking a long-term perspective.
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After all, I do not think that on an underlying basis, the company was really worth so much less at the start of the year than it is now. Similarly, I do not think the current share price – 44% lower than in April 2021 – accurately reflects the firm’s prospects now compared to then.
After all, Spoons told the City this week that last month saw its busiest ever Saturday. It also forecast its best ever annual sales, expects profits this year to be at the top end of analysts’ expectations and said net debt is lower than before the pandemic. In other words, it is booming – but it remains far below its previous high share price.
Valuing shares
In itself, that does not necessarily mean anything.
After all, maybe its previous valuation was overly optimistic. The past couple of years have highlighted a range of risks the business faces, from the government forcing hospitality venues to close for months on end to the impact of inflation on the low-price pub chain. Such risks persist.
Instead, as a shareholder I make my decision whether to hang on to my shares or sell them based on what I think Spoons’ long-term prospects look like.
Back in 2019, before the pandemic, the company made a post-tax profit of £73m. Over the next several years, I believe it can match and indeed top that. Compared to 2019, it now benefits from less competition and an improved balance sheet.
On that basis, J D Wetherspoon shares now trade on a prospective price-to-earnings ratio of 12, or even less. I think that looks cheap. The company has a unique value proposition, long experience and economies of scale. Those could all help it do well in coming years.
Good times ahead
That is why I plan to continue to hold my shares rather than sell them, even after the huge rally we have seen so far this year.
Although the prospect of record revenues is positive, I think the bigger challenge for Spoons in the next couple of years is profits. How can it convert those expected record sales into record profits too? After all, the hospitality industry has faced massive price increases on things from drinks to electricity. With its focus on low prices, the business may struggle more than some competitors to pass on such costs to patrons without losing sales.
Despite that challenge, I remain confident in its proven formula. The recent strong performance has boosted my confidence. I have no plans to sell.
