To me, the JD Wetherspoon (LSE: JDW) share price looks set to move higher — and there are some good reasons behind why that might happen, with Wetherspoons’ business trading well and some impressive forecasts for future growth.
Positive outcomes are never nailed-on certainties with any stock investment, of course. But that’s no reason to stop trying to buy well-performing stocks by analysing the fundamentals of the underlying businesses.
Good trading
City analysts have pencilled in an uplift in earnings of almost 40% for the trading current trading year to July 2024. And if the company hits that target, the business will deliver earnings of about 40p per share and net profit of around £52m.
But even at that level, net profit will still be around 29% lower than the almost £73m achieved in the trading year to July 2019 – before the pandemic.
There’s a lot for the company to play for just to restore the previous performance of the business. And things are moving in the right direction.
Wetherpoons is still with us after all it’s been through over the past three or four years. And that speaks well of the resilience of the brand.
The hospitality sector was among the hardest hit by the tsunami of economic and geopolitical events we’ve suffered. Circumstances such as the pandemic lockdowns, supply-chain problems, inflation, rocketing energy prices and the cost-of-living crisis have all affected the business.
But through it all, most branches of Wetherpoons are often heaving with customers much of the time, at least from my own experiences. People love the brand. And customer loyalty will likely be a big driver for the firm’s future success.
Profits set to rise
The full-year results for the trading year to 31 July 2023 are due on 6 October. And chairman Tim Martin said in July the company expects net profit to hit market expectations of just under £50m.
The good performance occurred because of ongoing sales improvements and “a slightly reduced expectation for cost increases, for example energy costs.” And Martin expects the firm’s decent second-half performance to continue into the first half of the current trading year.
However, there’s an argument to be made that the valuation might already be up with events. And that situation adds some risk for shareholders now.
With the stock near 709p, the forward-looking earnings multiple is just below 18 for the current trading year. And that level seems to build in some expectations for future growth.
There’s also a big chunk of debt on the balance sheet after the firm took on more borrowings to survive the pandemic. And that may drag on shareholder returns going forward, even if the business continues to thrive.
This stock may be a steady grower more than a coiled spring.
As with many businesses, the picture is a little fuzzy. But, on balance, I like what I’m seeing and would be inclined to dig in with deeper research now with a view to making Wetherspoons a long-term hold in my portfolio.
