A lot of British shares have been beaten down in price over the past few years – and many are struggling to regain their former levels. Indeed, that describes one FTSE 250 share I own. Its sales revenues are higher than they have ever been. Its share price has climbed 13% over the past year. Yet it remains 48% lower than it was five years ago.
I think that, over the next five years, the share could get back slightly above where it was five years ago — and double. Even that will be around a quarter lower than the high price it reached before the pandemic.
One of a kind
The share in question is J D Wetherspoon (LSE: JDW).
Spoons is one of only a small number of pub chains. Listed rivals include Mitchells & Butlers and Marston’s. Pub numbers are falling and that is a trend I expect to continue.
Nonetheless, I am upbeat about the prospects for Spoons. That is because I see it as a one-of-a-kind operator, giving it a sustainable competitive advantage. It has applied the age old business formula of ‘pile ‘em high and sell ’em cheap’ to the pub trade. Doing that has helped it build a wide, loyal customer base.
There is more to the FTSE 250 business than just cheap beer.
Food generates around 38% of revenues and the company runs hotels and has an extensive non-alcoholic drinks offering that puts it in competition with some cafes.
But what I see as core to the company’s competitive advantage is the market position it has built for itself as a reliable purveyor of very cheap ales.
Revenue rebound
Government-mandated lockdowns hurt sales and profits at the company badly.
But customer demand has bounced back and, along with price inflation, it pushed sales revenues last year to £1.7bn, within 5% of pre-pandemic levels. In the first half of its current financial year, like-for-like sales were 5% above 2019 levels.
The company aggressively grew its estate for some years. Lately, though, it has been closing sites. It has around 843 pubs in operation. I think the portfolio changes help position Spoons for a changing marketplace. Although total demand for pubs may be falling, I believe it can continue to grow sales by focusing on its unique price-led proposition.
FTSE 250 bargain
Earnings have been slower to return, although the company did break into the black again last year and recorded £19.3 in post-tax profits.
Risks to profits include spiralling product and staff costs, alongside cash-strapped drinkers staying at home rather than going to their local. But Spoons has a proven business model and was historically profitable every year from listing until the pandemic.
Net debt is now lower than it was going into the pandemic and a shrinking number of pubs nationally could push more custom towards those that survive.
Just as sales have done, I expect earnings to recover fully and more in coming years. I think that could help propel the share price back to where it stood in 2019, which would mean doubling along the way. If I had spare cash to invest I would happily add more of this FTSE 250 share to my portfolio.
