Does billionaire investor Warren Buffett enjoy a pint now and then? I don’t have the answer, but I do think FTSE 250 stock JD Wetherspoons (LSE: JDW) might be to his liking.
Buffett became a billionaire thanks to his keen eye for great businesses. He achieved near 20% returns for decades and decades through stocks that I believe have many similarities to ‘Spoons’.
The most important of these is a strong economic moat. Buffett coined this phrase and went on to call this type of competitive advantage the “most important thing” he looks for.
A ‘moat’ is a lake around a castle. This body of water makes breaching the castle challenging for any would-be invaders. It’s the same idea with a company.
A competitive advantage might involve having bigger margins or a better product than a competitor. But an economic moat is one step further. It’s an advantage so strong that other firms can’t hope to compete in terms of market share or attracting customers.
Record sales
Moats can take various forms. Common ones include a famous brand, a technological advantage, a unique corporate culture or efficient business practices.
Which one does Wetherspoons have? Well, it’s the last one. The chain serves drinks at prices that competitors big and small can’t compete with.
The last time I walked into a Wetherspoons I had to rub my eyes when seeing an IPA priced at £2.55. After purchasing my drink, I paced the breadth of the pub to find a chair to sit on and didn’t find a single one. Compared to the many half-empty bars I’d passed on the walk over, the place was packed.
My personal experience matches the company’s reporting, which showed record sales last fiscal year of £1.9bn. So far, so good.
Am I buying?
While I admire the moat of Wetherspoons, there are issues here. Supply costs have risen and earnings are weak. Ignoring the three Covid-affected loss-making years, last year’s £40m pre-tax profits were the second-lowest this century.
Investors have cooled on the stock too. The share price is down over 50% since January 2020. The firm now trades at just 17 times earnings – some way below the FTSE 250 30-year average of 25.
This strikes me as reasonable for a company with a solid growth story. And the nice thing about companies with great moats is it’s sometimes worth paying a little extra.
One of the Oracle of Omaha’s most famous quotes is: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Buffett doesn’t own Wetherspoons and probably never will. The £1bn market value is on the smaller side for the amount of wealth he has. Luckily for me, I don’t suffer from such issues. I may pick up some shares in the near future.
