J D Wetherspoon shares are soaring – but still look like a bargain!

It has been a banner year so far for the pub operator JD Wetherspoon (LSE: JDW). The stock is up 50% since the start of 2023. Despite this, JD Wetherspoon’s shares remain 15% below a year ago – and are down around 60% since the start of 2020, before the pandemic and government restrictions hit the pub trade. .

In fact, despite going up this year, I think they still look cheap.

I have bought more in recent months. If I had the money to invest today, I would be happy to buy more, because I think the stock is still cheap. This is why.

Lowest value from JD Wetherspoon

To figure out what Spoons shares are worth, I first need to look at the long-term outlook for the pub trade. Pub numbers are down significantly and this is likely to continue for some time.

Reducing market size is a red flag. In this case, though, I can actually help Spoons. The chain is a price fighter with a proven business model. I think it stands to benefit from more expensive competitors closing their saloon doors, as customers move custom to Spoons.

After all, the value of the company also depends on the size of its own profits, regardless of the size of the market. This has now passed pre-pandemic levels. I think this is a sign of how to run a business.

An important element, in my opinion, is how much of the profit Spoons can turn into profit. This can be a challenge for operators who compete on price, even before increasing the current risk to profits caused by high inflation.

Interesting evaluation

Back in 2019, the company’s net profit margin after tax was 4%.

In the first half results published last week, the figure was less than 0.1% (before allowing for one-off items). It’s a thin margin. But with profits increasing and the business gaining momentum, I think Spoons should be able to increase profits, hopefully significantly.

If full-year revenue growth matches the first half level of 5% compared to pre-pandemic 2019 figures, and profit margins return to where they are, JD Wetherspoon’s shares are currently trading at a prospective price-to-earnings ratio of 11.

I can take a few years for the profits to recover, but still see the price as highly attractive.

Risk and reward

Of course, that’s assuming everything works out. The company has invested heavily in property renovations over the past few years. The growing revenue shows that this is paying off. The difficult balancing act now is to set prices at a level that makes a good profit margin without scaring customs.

With a proven business model, strong value proposition, large customer base and strong first half results, I believe the company can make this happen. For a quality business, JD Wetherspoon shares continue to look cheap despite their strong performance so far in 2023.