The sun is out, the pubs are open, and under-50s are now eligible for Covid-19 vaccines. Is it time to start buying pub stocks such as JD Wetherspoon (LSE: JDW)? Investors seem to think so. The Wetherspoons share price has risen by more than 30% already this year.
Shares in the chain, which has 872 pubs in the UK, have risen by 44% over the last 12 months. I expect Wetherspoon’s business to make a strong recovery, but can the stock keep rising? I’m not so sure.
Watered-down profits
It’s too soon to know how well Wetherspoon’s pubs are trading. But I think it’s fair to say that many people will be happy to be able to go to the pub again.
However, as a potential shareholder I’m concerned about the impact of Wetherspoon’s fundraising activities over the last year. In total, the company has raised £235m of fresh cash by selling 24m new shares. These deals were done when Wetherspoon’s share price was much lower, so buyers who picked up new shares are sitting on attractive profits today.
Raising funds in times of difficulty is never ideal, but I think it was necessary. The extra cash has allowed the company to stay afloat during lockdown and make the changes needed to reopen.
However, these fundraisings will have longer-lasting consequences for shareholders. The total number of Wetherspoons shares in issue has risen from 105m to 129m over the last year. This means that one share today represents a smaller stake in the business than it did one year ago.
Mind the gap!
These extra shares mean that even if Wetherspoon’s profits return to pre-pandemic levels, earnings per share will still be lower. For example, in 2019. Wetherspoons reported a net profit of £72.8m and earnings of 69p per share. I estimate that if the company generated the same profit today, earnings per share would be just 56p. This fall in comparable earnings is what I mean by minding the gap.
Don’t get me wrong — I think Wetherspoons is a well-run business with a strong future. I’d be happy to own the shares, but only at the right price. I’m not sure the price is right for me today.
Wetherspoons share price: good value?
Why does dilution matter? It reduces the price I’m prepared to pay for Wetherspoon’s shares. Here’s a quick example.
The pub chain’s market cap today (the value of all its shares) is about £1.8bn. In late December 2019, ‘Spoon’s market cap was also £1.8bn. However, the share price as I write is 1,375p. In late December 2019, Wetherspoon’s share price was trading at about 1,700p.
This tells me that even though today’s share price is lower, the business is valued at the same level as it was before the pandemic. Given that Wetherspoon’s share price hit an all-time high in 2019, I think it’s fair to say that a full recovery is already priced into the stock.
For this reason, I won’t be buying Wetherspoon’s shares at current levels. I think I’ve left it too late, so I’ll hope for a better opportunity in the future.