Who would want to be a publican right now? Between price increases, staffing shortages and logistics issues, it is not an easy time for the trade. That helps explain why pub shares are struggling. JD Wetherspoon (LSE: JDW) has seen its shares fall 45% in the past 12 months while rival Mitchells & Butlers is down 35% and Marston’s has fallen 33%.
As a believer in the investment case, is the current JD Wetherspoon share price an opportunity for me to add more to my portfolio?
Falling share price
What I find attractive about pub groups right now is the demand outlook. People like to go out and socialise and a pub is the obvious place to do that in many areas. Customer loyalty is often strong, which leads to repeat purchases. Financial and regulatory pressure on pubs in recent years has led to many closing. That is a shame for them, but offers increased opportunity for successful pub operators.
I see Wetherspoon as an attractive way to get exposure to the sector because of the company’s well-honed business model. It has developed a clear position in the market and has stuck to it. I feel it executes its strategy very well. Wetherspoon offers a consistent experience with a large, loyal customer base.
Despite that, the JD Wetherspoon share price has lost almost half its value in the past year.
But although Wetherspoon, like its rivals, faces significant challenges right now, I expect them to pass with time. I reckon inflation will start to fall at some point in coming years and staffing shortages should ease. But the share price fall does not reflect that optimistic view.
Another round of risks?
Indeed, things could get worse for the trade before they get better. In its half-year results this week, Mitchells & Butler said: “The trading environment remains difficult. Cost headwinds present a significant challenge to the industry”.
That could mean higher costs at Wetherspoon keep eating into profits. In 2020, the company recorded its first loss since 1984. It remained lossmaking last year and the interim results for this year were again in the red.
It may be that some patrons have got out the habit of visiting pubs and will return less frequently than before the pandemic, if at all. A looming recession could also make cost-conscious drinkers opt for cheaper alternatives than visiting a pub.
Why I’d buy
Even considering all of that, I see the company as a well-run business with an attractive model, which is simply in a sustained period of difficult trading conditions. If they pass, which I expect them to, the underlying strengths will hopefully reassert themselves.
I therefore think the company looks cheap at the moment, with its market capitalisation of £915m. The company’s freehold and long-leasehold property alone is valued at £1.1bn and has not been revalued in over 20 years. Its business has a large, loyal customer base and its focus on low prices could help it do well, even in a recession.
I see the current JD Wetherspoon share price as a bargain and would consider buying more to hold in my portfolio with a patient investing mindset.