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UK pub stock J D Wetherspoon (LSE: JDW) is on fire at the moment. Since Monday last week (24 November), it has surged from 619p to 704p, turning a £5,000 investment into almost £5,700.
So, what’s behind this explosive share price move? And is the stock worth a look today as a long-term investment?
Why the share price is rising
The share price pop here seems to be related to the recent UK Budget. In the Budget, there were several things that could impact J D Wetherspoon favourably.
One was reform of the UK business rates system. Here, the government announced a permanent lowering of the business rates tax for properties used for retail, hospitality, and leisure (RHL) with a rateable value (RV) below £500,000. Investors have clearly seen this as a positive for the pubs operator. However, I’ll point out that my colleague Stephen Wright – who has a large position in Wetherspoons shares – believes that it could actually help competitors more.
Another was increases to the National Minimum Wage (NMW). This shouldn’t have too much of an impact on Wetherspoons as it already pays its employees more than NMW. But it could have a significant (negative) impact on competitors. So, it’s probably a win for the company.
Worth a look today?
Is the pub stock worth considering near 700p? Potentially.
There are a lot of things I like about this company from an investment perspective.
For a start, there’s its very successful ‘value proposition’ business model. Customers love this – every time I walk past my local Wetherspoons in London, nearly every seat in the pub is taken.
Second, performance is solid despite the stagnant UK economy (helped by that value proposition business model). For the first 14 weeks of the financial year started 1 August, like-for-like (LFL) sales were up 3.7% year on year.
Third, the valuation looks reasonable. Currently, the stock trades on a forward-looking price-to-earnings (P/E) ratio of about 13 (slightly below the UK market average).
Of course, it’s not perfect. On the downside, debt is a little high.
At the end of July, net debt excluding IFRS-16 lease debt was £724m. That’s not ideal with interest rates at relatively high levels.
Rising costs are another factor to think about. Food ingredients, energy, transportation, labour…a lot of costs are rising at the moment (meaning less profit).
The dividend yield is also a little underwhelming. Currently, it’s only 1.7%, so there’s not much income on offer here.
Better investment opportunities today?
Weighing everything up, I see a solid investment proposition overall. Taking a long-term view, I think the stock has the potential to do well.
That said, I think there are probably better investment opportunities in the market to consider today. Right now, I see quite a few stocks with more potential than J D Wetherspoon.
