I own a few FTSE 250 stocks in my investment portfolio, but there’s one in particular that I’ve been buying lately. The stock is JD Wetherspoon (LSE:JDW).
At first sight, the pub business isn’t an obvious choice. But for investors with a long-term outlook, I think it could be a great choice.
Low prices
The investment thesis is relatively straightforward. JD Wetherspoon offers lower prices than its competitors in an industry that I think is going to remain in demand for the long term.
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That’s a powerful position to be in, but it’s only part of the equation. Offering low prices to customers is one thing, but unless it’s backed up by lower overhead costs, it doesn’t make for a good business.
But Wetherspoon does have lower costs than its competitors. One of its biggest advantages in this regard comes from its property portfolio – 71% of which it owns outright.
This means the company doesn’t have to make lease payments on almost three-quarters of its pubs. And it can pass on those savings to customers in the form of lower prices.
Election risk
Inflation is a challenge for almost any business, but especially for those focused on offering low prices to customers. And Wetherspoon is no exception.
In general, higher input costs present a dilemma for companies. They either have to raise prices to pass these through at the risk of losing customers, or face a reduction in margins and profits.
The rate of price increases might be coming down steadily. But the Labour Party has promised to boost wages if it wins the next election and the bookmakers think there’s a decent chance of this.
This could have a similar effect on companies like Wetherspoon. And investors need to keep in mind the risks the business is facing.
Market position
There are a few things worth noting, though. The first is that higher staff costs are likely to be an issue across the pub industry, rather than one specific to Wetherspoon.
That means the firm’s competitors are likely to face the same issue of maintaining margins as costs increase. But the issue is arguably more pressing for a business focused on low prices to customers.
The second is that Wetherspoon is unusually good at finding a way out of a dilemma. Instead of increasing prices or facing lower profits, it has found ways to reduce its own costs elsewhere.
This brings us back to the point about lease obligations. By investing in its properties and buying them outright, the company has been able to maintain both its low prices and its profit margins.
A stock I’m buying
I think the company is unusually well-positioned to deal with the biggest risk facing the pub industry – the threat of higher staff costs. And there’s another potential boost on the horizon too.
Lower interest rates should drive consumer spending and help the company improve its balance sheet. That’s why I’ve been buying the stock for a while now and I’m planning to continue.
