Research shows that founder-led companies tend to produce the best returns for shareholders over the medium to long term. It’s difficult to tell exactly why this is the case, but researchers have speculated that it has something to do with the fact that founders generally view their businesses through a long-term lens, and they are more likely to prioritise investment for the future over short-term profit maximisation.
Founder-led growth
JD Wetherspoon (LSE: JDW) is a fantastic example of this thesis in action. Over the past decade, this founder-led pub group has outperformed the FTSE 250 by around 4% per annum including dividends, and over the past five years, it has outperformed somewhere in the region of 6% per annum.
I think a great deal of this performance can be attributed to chairman and founder Tim Martin’s attention to detail.
Martin spends most of his time travelling around the country, eating and drinking in the company’s establishments. He’s not afraid to point out any problems if they exist and will help each pub manager deal with any issues they may have. It is rare for a chairman to adopt such a hands-on approach, but it is clearly working. The firm’s reported earnings per share have grown at a compound annual rate of 11.5% since 2013.
And it doesn’t look as if it is going to stop growing anytime soon. A trading update published today tells us that sales for the 13 weeks to the end of April 2019 increased 7.6% on a like-for-like basis and total sales increased by 8.4%. Following this robust performance, Martin believes the company is on track to meet expectations for the current financial year. Unfortunately, the City has pencilled in a decline in earnings per share of 7.8% for the full year as higher costs bite, but growth is projected to return in 2020.
Based on analysts’ current figures, the stock is trading at a 2020 P/E of 17.3, which is a little on the high side, although considering the historical growth, I’m willing to pay a premium to get my hands on the shares. That’s why I’m a buyer of the stock today.
Undervalued income?
If that one is too pricy for you, then I highly recommend taking a look at shares in its peer Marston’s (LSE: MARS). At the time of writing, shares in this pub and dining group are trading at a forward P/E of just 7.1, which is significantly below the sector average of 16. At the same time, the stock supports a dividend yield of 7.5% and is trading at a price to tangible book ratio of less than one, implying that it would be worth more if it were sold and broken apart than it is in its current form.
The question is, why are investors giving this business such a wide berth?
Well, it looks to me as if Marston’s is suffering from the same pressures as its peer. Rising staffing and input costs are expected to weigh on earnings this year. Analysts have pencilled in a decline in earnings per share of 8.2% following a drop of 8.4% last year. Two years of contracting profits is disappointing, but the group is expected to return to growth in 2020, the deeply discounted valuation also provides a margin of safety in my opinion. So, if you are looking for value stocks, Marston’s might be worth your research time.
