Why this UK growth stock looks set to double

When I saw it JD Wetherspoon (LSE:JDW) shows, did I see? Low margins, low capital, and high debt? I’m not wrong, but I also see growth stocks set to double their share price.

The company’s earnings have been affected by the key Covid-19 and the stock is down 66% since the beginning of 2020. But as I see it, it is better than what Mr. Market thinks.

Covid 19

Unsurprisingly, JD Wetherspoon has had a tough time during the pandemic. The business reported a free cash flow loss of 54p per share in 2020 and 68p in 2021.

In addition, the company’s debt increased from £780m in 2019 to £991m in 2020, and this is a major risk. Even with profits returning to 2019 levels, free cash flow in 2022 comes in at 17p per share.

I don’t think debt is as much of a problem as some people seem to think, but we can return to debt in a bit. The reason I think the stock will double has to do with earnings.

Covid-19 is certainly a big challenge for JD Wetherspoon. But business does more than just survive – it’s making investments that I think provide long-term earning power.

Investment

First and foremost, JD Wetherspoon has invested heavily in new pubs and buying freeholds. I expect this to provide a significant boost to our revenue and profitability going forward.

Furthermore, companies lowered prices during the pandemic when competitors did not. That gives us scope to increase in the future, while still having the lowest customer prices.

These investments put the business in a stronger position than before the pandemic. But it also means last year’s free cash flow was around £76m thanks to one-off investments.

Adding it back takes free cash flow per share to 70p. From there, I think that the stock has a clear path back to 92p – the amount made when trading at twice the price of the day.

Debt

Okay, let’s get back to debt. Corporate loans are probably the biggest risk to the investment thesis here, but there are three reasons I think investors consider this risk.

Firstly, just over 80% of JD Wetherspoon’s debt remains at 1.24% interest until 2031. At that rate, I don’t think we’ll see an earnings recovery for the next few years.

Second, the Chairman confirmed in the 2022 annual report that it emerged from the pandemic with a stronger balance sheet than before. This is due to a 19% increase in the number of shares.

Third, the debt is not a short-term solution to a difficult situation. Most of these increases are the result of investments that were planned before the pandemic.

Stocks to buy?

Shares in JD Wetherspoons are up 25% since the start of the year. And I have a lot more to go.

Exactly when the stock will reach £11 I don’t know. But I think there is a lot of earning power here and I plan to buy the stock before the rest of the market realizes it.