Earnings: after a huge free cash flow boost, is the J D Wetherspoon share price a bargain?

JD Wetherspoon (LSE:JDW) released its interim earnings report today – results look good and the share price is up.

The number that jumps off the page is free cash flow of £166m, or £1.32 per share. For a company with a share price of around £6, that’s a lot.

So, is the stock a bargain right now, or is there more to it than meets the eye? I think the answer is: ‘both’.

earnings

Let’s start with the free cash number. If the company will earn £1.32 per share in free cash every six months (or even annually), then the shares could be a steal at £6.

This is very unlikely, though. Free cash flow numbers over the past six months were driven by the sale of several interest rate swaps, which have protected the business from rising rates.

The sale netted JD Wetherspoon around £169m. In other words, it accounts for almost all of the company’s free cash flow.

The benefits are tangible and give businesses more cash on the balance sheet. But there is nothing to think about when figuring out what the future will look like in business.

That’s not to say the report isn’t encouraging. Revenue, operating profit, and earnings per share were all higher than in the same period 12 months ago.

Debt – one of the most obvious risks with stocks today – is also down significantly. And the company continues to invest significantly in new pubs and freehold purchases.

Overall, I think this is an encouraging report that shows that JD Wetherspoon is moving in the right direction. But it is important to know what is part of the remaining story and what is not.

Stocks to buy?

I have thought that shares in JD Wetherspoon were undervalued for some time now, but I have not bought shares yet. With the stock price up 38% since the start of the year, am I missing an opportunity?

There is no question that I would have done better if I had bought the stock back in January. But I still think there’s a good case for buying the stock at current prices.

While the benefits of selling interest rate swaps will never be repeated, there are also similar costs. The company has invested heavily in pubs recently.

Over the last six months, JD Wetherspoon has spent around £19m on new pubs and freehold conversions. As of 2020, that number is around £179m.

There are two things to note here. First, the investment may be a one-time expense and therefore will not consider future cash flows.

The second is that I expect this will make the company more efficient. That’s why I think the stock is a good value even after the recent stock price drop.