Next month, the company will provide investors with final results for its 2019/20 financial year. Now, no one expects the numbers to be good. Indeed, easyJet has already warned that its first-ever annual loss could hit £845m! Nevertheless, the possibility of another lockdown and further travel restrictions could result in more investors deciding to jettison the stock in November.  

The company is doing what it can to mitigate things. Most recently, easyJet reported that it had raised almost £306m through the sale and leaseback of nine Airbus 320 aircraft. This will help shore up the balance sheet but it’s unlikely to be enough. Indeed, the mid-cap has called on the UK government to provide more support to the sector in October.  

Clearly, easyJet shares could do very well in the event of a sudden vaccine breakthrough or reduction in infections. Right now, this looks like wishful thinking. With industry peer IAG warning that passenger numbers won’t recover to pre-coronavirus levels until 2023, the runway to recovery looks long and hard. 

This is not to say that the Luton-based airline is the only company whose owners face a nightmare November. 

Time at the bar?

Holders of JD Wetherspoon (LSE: JDW) may want to look away from the pub chain’s share price when it provides a trading update on the morning of 11 November.

I can’t see the numbers and outlook as being anything but bleak. After all, JD Wetherspoon already announced its first annual pre-tax loss since 1984 earlier this month. The recent introduction of curfews across many parts of the UK is unlikely to have improved the situation. News of the company needing to slash jobs, while not unexpected, doesn’t bode well either. 

Like easyJet shares, the question to ask is how much of this is priced in. At half the price they were at the beginning of 2020, you might think ‘quite a lot’. Moreover, analysts are expecting earnings to rebound massively in FY22, leaving the shares on a P/E of 13 (if you still pay any attention to forecasts). 

Nevertheless, I’d be inclined to look elsewhere, at least until the crucial coronavirus ‘R rate’ is on the retreat. On a risk-reward basis, JDW still doesn’t tempt me. 

Double-whammy

A final share that could face selling pressure next month is high street retailer and travel concession operator WH Smith (LSE: SMWH). The company is due to announce its latest set of full-year numbers on 12 November. 

Before the coronavirus reared its ugly head, it was a quality business generating excellent returns on capital employed. Since then, we’ve had the double-whammy of deserted high streets and a myriad of travel restrictions. The latter is particularly problematic since this was the main growth driver for the FTSE 250 member. 

With Boris Johnson’s fingers hovering over the ‘lockdown’ button, it does feel like things could get worse before they get better. More restrictions would likely have a severe impact on pre-Christmas high-street sales for the company. I wouldn’t like to bet on it being able to compete with the likes of Amazon for online book sales either.

For now, WH Smith is treading water. Next month could see it sink. Now is not the time to be getting involved, I feel. 

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Last year’s pre-tax profit of £102m has turned into a pre-tax loss of £34m, today’s preliminary results show. Like-for-like sales fell 29.5%, with revenues down almost a third to £1.26bn. The FTSE 250 group has called time on its shareholder payouts. It didn’t pay an interim dividend in March 2020, and is not proposing a final payment, either.

Investors who piled into the JD Wetherspoon share price when the pubs reopened will need a stiff drink today. However, the stock is not a total disaster. It still trades around 20% higher than at the depths of the stock market crash. Contrarian investors will see today’s slump as a buying opportunity. This is a savvy business, that will do everything in its power to survive the pandemic. Investors can make good money from buying stocks in troubled times like these, but they must also understand the risks.

Lockdown losers

JD Wetherspoon has a fight on its hands, and there is more than the share price at stake. The company is cutting 108 jobs at its head office, plus another 450 at its six airport pubs. These are hard times, especially for the hospitality industry.

This follow yesterday’s grim news that pub and brewer Marston’s is dispensing with 2,150 furloughed staff, blaming the latest Covid restrictions and the end of job retention scheme. Last week it was the turn of Greene King, which axed up to 800 jobs and closed 79 pubs and restaurants.

Conservative Party donor Martin is furious at the government’s “ever-changing raft of ill-thought-out regulations”, which he says are “extraordinarily difficult for the public and publicans to understand and to implement”.

JD Wetherspoon share price is tempting

The curfew and introduction of table service have been particularly damaging, “depressing sales for customers who find it too much ‘faff’, at the same time as substantially increasing costs”, Martin added.

Inevitably, everything hangs on the lockdown. If the government retreats – or better still, Covid-19 retreats – today could be an excellent buying opportunity. Wetherspoons is a flexible business, but it also needs to maintain high volumes to fund its cheap beer and food business model. It has already been squeezed by an extra £29m of pandemic costs, including perished stock, protective equipment and hygiene measures.

There is another threat. Unemployment is set to rise sharply and this will hit customer spend, even if people are allowed to enjoy themselves at the pub. Maybe that will favour JD Wetherspoon, known for its cheap prices, but I suspect not. Its customers may be among those hardest hit.

The JD Wetherspoon share price is in for a tough winter. Management is likely to respond with some cunning marketing tactics, along the lines of its ‘Stay out to Help Out‘ scheme. I’m not brave enough to buy it today, but you might be.

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Tighter restrictions mean that pubs will now close in the highest-risk areas. Nobody knows how long these restrictions will last. Likewise, with Covid cases escalating rapidly in most of Europe, companies that rely on travel look set for a prolonged bout of misery. There are now very few places abroad that UK citizens can travel to freely.

While this undoubtedly affects a great many companies, Wetherspoon and Carnival could be impacted immediately. If I held either of these two FTSE 250 shares, I reckon I’d sell out now and invest in something that would help me sleep a bit better at night.

Last orders

Wetherspoon was quick to reopen after the initial lockdown closed all of its pubs back in March. By the end of August, more than 95% of its pubs had reopened. But not even Rishi Sunak’s Eat Out to Help Out scheme was enough to maintain revenues at last year’s levels. From the beginning of July to mid-August, like-for-like sales were 17% below the prior year.

Following lengthy pub closures and the erosion of profit margins, the company expects to make a loss for this year. That’s not exactly surprising. But Wetherspoon’s shares still look overpriced, in my opinion. The shares trade at 16 times last year’s earnings, a period that was unaffected by Covid. That wouldn’t be cheap in a normal year. New restrictions mean the group will remain unprofitable for longer and will take longer to recover. In my mind, that’s still not reflected in the Wetherspoon share price.

Carnival shares have further to sink

Carnival has been more affected by Covid than most, with its cruise business effectively shut down for six months. Only in the last month has the company resumed a very small number of its cruises. This is reflected in its financial performance. In the nine months to the end of August, the group made a whopping net loss of over £6bn, with revenue down 67% from the year before.

A deteriorating Covid outlook has forced the group to cancel the majority of its cruises until next spring. It still has £6bn in cash, but a monthly cash burn of over £500m means that might not last long. What’s more, the group has borrowed so much just to survive the next year that repayments are going to eat into profits for the foreseeable future. It owes £5bn in repayments in 2023 alone. The Carnival share price has already fallen over 70% this year, but I think it’s got further to fall yet.

Holding Wetherspoon or Carnival shares isn’t just about whether the companies will survive the next year or two. It’s also about what the travel and hospitality sectors will look like in a few year’s time. I have no doubt that the hospitality sector will eventually recover. But I do have doubts about what the cruise industry will look like in the future. For a good night’s sleep, I think it’s best to sell shares in these companies now. There are so many better companies to invest in.

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Here’s my take.

Cineworld: a trader’s delight?

Cineworld neatly sums up just how tricky investing in the leisure sector is at the moment. Priced just above 21p back in March, the shares went as high as 99p earlier this month. At Friday’s close, however, Cineworld shares could be yours for 64p. This is what happens when the only thing moving stocks is sentiment rather than earnings.

The most recent pullback makes sense when you consider the guidelines Cineworld must comply with when it reopens its doors. These include offering hand sanitiser on entry, floor markings and protective screens for staff.

Within screenings, staff will likely be asked to enforce social distancing rules and ensure people stay in their allocated seats. Factor-in fewer film showings and the costs of extra cleaning and you can see why a few in the market have decided to bank profits. 

Now, it could be that some people would love the opportunity to see a film with no one around them. Some may also be sick of streaming movies at home and just want the big-screen experience, in spite of the dearth of new releases.

Personally, I just can’t see people sprinting back to their multiplex for a less-than-optimal viewing. As such, this still doesn’t feel like a good investment, even though people will surely continue making good money from trading Cineworld’s shares.

Does this make JD Wetherspoon a better buy by default? Possibly, but there are quite a few caveats. 

Too big to fail?

As the UK’s biggest pub operator, the FTSE 250 stock will surely reap the benefits if things go well.

Its pubs have an average size of 4,000 sq ft of customer space, making social distancing less problematic than for some. Roughly 75% also have beer gardens or roof terraces. In addition to this, the company has introduced new queueing systems, disposable menus and screens to protect customers and staff. People will also be encouraged to order and pay via its app rather than at the bar.

Compare all this to smaller operators who don’t have the ability to invest a reported £11m in setting up their sites and JD seems like the least risky pick of the listed bunch. The shares are, after all, still almost 40% below where they were at the start of 2020.

On the other hand, JD Wetherspoon could suffer more than others if things go badly. An awful lot of sites are located in bustling cities. Logic would suggest these are at greater risk of a second wave and localised lockdown.

Regardless, the fact that ‘outspoken’ Chairman Tim Martin initially refused to close any pubs in spite of government advice may have cost the company a few previously-loyal customers along the way. 

Best bargain

All told, I think JD Wetherspoon just about wins this battle of battered stocks and would be my pick if I had to choose between it and Cineworld.

What I am more sure about is that anyone considering adding either stock to their portfolios should check that they are suitably and sufficiently diversified elsewhere first.

The post Cineworld shares or this FTSE 250 pub stock: which is my best bargain buy? appeared first on The Twelfth Magpie.

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Today, the JD Wetherspoon share price is up almost 30%, despite issuing a profit warning and cancelling its dividend. This market response is a sign of the crazy times we live in. Can it continue to defy the stock market crash, and should you buy it today?

This morning’s half-year report showed like-for-like sales up 3.2% in the six weeks to 8 March, and total sales rising 2.9%. The crisis then kicked in and sales fell 4.5% in the week to 15 March, with the decline accelerating this week, after prime minister Boris Johnson advised the population to avoid pubs.

Stock market crash woe

JD Wetherspoon chairman Tim Martin said while predictions are inevitably difficult right now, the group now anticipate profits “being below market expectations, so long as the current health scare continues.”  So it’s impossible to provide realistic guidance on group performance in the remainder of the financial year.

The company has decided to delay most capital projects and to reduce expenditure, where possible. Meanwhile, shareholders will also bear some of the cost, as the interim dividend is cancelled.

However, Martin struck an optimistic note, saying that with the government’s proposals on business rates relief and credit guarantee facilities, “the company believes it has sufficient liquidity to maintain operations at a substantially lower level of sales.” Hence the rebound.

JD Wetherspoon share price spike

But for Covid-19, these would have been a positive set of results, with interim pre-tax profits up 15.2% to £58m, and revenues up 5% to £933m.

JD Wetherspoon isn’t quite as big a bargain as it was before today’s spike, with a forward valuation of 12 times earnings. The months ahead will be bumpy as the crisis plays out, and the next set of results will inevitably make painful reading.

However, the government is now pulling out all the stops to make sure otherwise solid companies like this don’t go to the wall (and leave a massive hole in the nation’s high streets) during the stock market crash.

Martin has criticised the government’s lockdown, suggesting it should stick to its original plan of building herd immunity. But frankly, that isn’t his call. While people are still hitting the pubs, I expect that to decline, as the number of cases rise and the death toll climbs.

One day, drinkers will be back with a vengeance though. And a raging thirst.

This is a tough time to put money into stocks like JD Wetherspoon, although that clearly isn’t deterring bargain seekers today. There’s a good case for buying the JDW share price, but I wouldn’t jump straight in after today’s resurgence.

Wait a little…

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Whatever the Wether

Its stock is up another 2.7% today after posting a 6.9% rise in like-for-like sales for the 10 weeks to 7 July, with year-to-date total sales up 7.4%. The ‘Spoons’ share price has now climbed 13% over the past year, and an intoxicating 99% over three years.

The £1.53bn FTSE 250 group has opened five new pubs since the start of the financial year, and disposed of nine. The downside is that these were below the value in its balance sheet, and it now expects about £3m of exceptional, non-cash losses this financial year as a result.

It has also spent £71m buying the freeholds of pubs of which it was previously the tenant and bought back £5.4m of the company’s shares. It described its financial position as “sound”, with year-end net debt expected to be about £745m.

Brexit boss

Chairman Tim Martin is a vocal Brexiteer and the vast majority of today’s statement is an argument in favour of what most people call a no-deal EU departure, but he names a “multi-deal” Brexit. I’m leaving the politics of this well alone but the key point for investors is that JD Wetherspoon is prepared, deal or no deal, having made arrangements to replace French Champagne and brandy and German beer with alternatives from the UK, Australia and America. 

Inevitably, given share price growth, Wetherspoon’s stock is a little pricey trading at 19.1 times forecast earnings, while it yields less than 1%. However, there’s a strong case for buying a company whose hands-on founder is still at the helm.

Greene is good

It’s fascinating to compare it with the UK’s largest brewer, Greene King (LSE: GNK), which has had a far more mixed time of it, its stock falling 16% over three years.

The GNK share price is up 9% in the last year but has gone flat lately, as recent wet weather conditions hit sales. Hopefully, the current warm spell will reverse that. Full-year revenues grew just 2% to £2.2bn for the year to 28 April, with profit before tax up a similar percentage to £246.9m, excluding exceptional and non-underlying items. Greene King IPA, Old Speckled Hen and Abbot Ale are all personal favourites of mine so I was glad to see their sales rise 6% to £227.6m.

What in the world…

There’s no men’s football World Cup this year to give the group a lift, which worries me given that last year overall profit before tax still slid 13% to £172.8m (despite Gareth Southgate’s England team making it to the semis), due to rising operating and finance costs. The £1.9bn FTSE 250 group is now cutting costs, focusing on labour productivity alongside other efficiencies.

Greene King is way cheaper than Wetherspoon, trading at just 9.6 times forecast earnings, while yielding a meaty 5.4%, nicely covered 1.9 times.

Just the job for thirsty income seekers and the main attraction here, given lowly earnings projections and management warnings that political and consumer uncertainty will weigh on confidence. Royston Wild says you can buy it with a clean conscience, though.

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Founder-led growth

JD Wetherspoon (LSE: JDW) is a fantastic example of this thesis in action. Over the past decade, this founder-led pub group has outperformed the FTSE 250 by around 4% per annum including dividends, and over the past five years, it has outperformed somewhere in the region of 6% per annum.

I think a great deal of this performance can be attributed to chairman and founder Tim Martin’s attention to detail.

Martin spends most of his time travelling around the country, eating and drinking in the company’s establishments. He’s not afraid to point out any problems if they exist and will help each pub manager deal with any issues they may have. It is rare for a chairman to adopt such a hands-on approach, but it is clearly working. The firm’s reported earnings per share have grown at a compound annual rate of 11.5% since 2013. 

And it doesn’t look as if it is going to stop growing anytime soon. A trading update published today tells us that sales for the 13 weeks to the end of April 2019 increased 7.6% on a like-for-like basis and total sales increased by 8.4%. Following this robust performance, Martin believes the company is on track to meet expectations for the current financial year. Unfortunately, the City has pencilled in a decline in earnings per share of 7.8% for the full year as higher costs bite, but growth is projected to return in 2020. 

Based on analysts’ current figures, the stock is trading at a 2020 P/E of 17.3, which is a little on the high side, although considering the historical growth, I’m willing to pay a premium to get my hands on the shares. That’s why I’m a buyer of the stock today. 

Undervalued income?

If that one is too pricy for you, then I highly recommend taking a look at shares in its peer Marston’s (LSE: MARS). At the time of writing, shares in this pub and dining group are trading at a forward P/E of just 7.1, which is significantly below the sector average of 16. At the same time, the stock supports a dividend yield of 7.5% and is trading at a price to tangible book ratio of less than one, implying that it would be worth more if it were sold and broken apart than it is in its current form.

The question is, why are investors giving this business such a wide berth? 

Well, it looks to me as if Marston’s is suffering from the same pressures as its peer. Rising staffing and input costs are expected to weigh on earnings this year. Analysts have pencilled in a decline in earnings per share of 8.2% following a drop of 8.4% last year. Two years of contracting profits is disappointing, but the group is expected to return to growth in 2020, the deeply discounted valuation also provides a margin of safety in my opinion. So, if you are looking for value stocks, Marston’s might be worth your research time.

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Heavier Wether

The FTSE 250-listed group has been a fast grower but may be slowing. It’s up 96% measured over three years, but down 5% over the last 12 turbulent months.

Today’s update, covering the six months to 27 January, showed like-for-like sales increasing by a robust 6.3%, and total sales by 7.2%. Second-quarter growth was slightly faster, with comparative sales rising 7.2% and total sales up 8.3%.

Brexit bonus?

Chairman Tim Martin hailed “strong” sales growth with the proviso that: “Costs, as previously indicated, are considerably higher than the previous year, especially labour, which has increased by about £30m in the period.” Although JD Wetherspoon was pressured into raising wages for its workers, interest, utilities, repairs and depreciation have also got pricier.

Martin is a renowned Brexiteer and, again, a chunk of this update focuses on the impact of leaving the EU, arguing that it will cut business costs by reducing tariffs on non-EU imports. He also said the £1.25bn group “remains in a sound financial position,” although net debt at the end of this financial year will be around £10m higher.

Credit where it’s due

JD Wetherspoon has agreed a new five-year revolving credit facility of £875m (up from £820m) on attractive financial terms. As Kevin Godbold points out, shareholders have been rewarded with multi-bagging gains since it came to market.  The stock is up 11% over the last month to trade at 15.8 times forecast earnings. Sadly, it’s no bargain.

The stock yields just 1%, with cover of 6.2. City analysts, predicting that earnings will fall this year and next, leaving me a bit underwhelmed even if Brexit does bring us cheaper Cambodian rice imports, as Martin hopes.

Easier being Greene

The pub trade is tough right now but FTSE 250 hospitality group Greene King (LSE: GNK) has greater diversification. It owns more than 3,000 pubs, restaurants, and hotels across the UK, with brands including Chef & Brewer, Farmhouse Inns, Hungry Horse, Wacky Warehouse and Loch Fyne Seafood & Grill. However, food chains are also under pressure generally.

Its stock trades 27% lower than three years ago, but this hides a tasty recent comeback, up 25% in three months. It was heading in the right direction even before the market recovery, as World Cup and warm summer momentum continued into autumn.

Cash is King

Profits have been under pressure but Greene King remains highly cash generative, meeting its debt repayment requirements, investing in pubs, and paying a sustainable dividend out of operating free cashflow. The £1.86bn group trades at a knockdown valuation of 9.5 times forecast earnings. Earnings are expected to be flat this year, then rise 1% and 6%, while the tasty forecast yield of 5.5% looks safe with cover of 1.9.

As consumer incomes finally outpace inflation, things could look brighter for the pub sector. And Edward Sheldon reckons its shares could quickly pay for themselves by giving you 25% off food and drink for a year. I’ll drink to that.

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Can the concept endure?

So, I wonder whether Revolution Bars Group has the legs to make a decent long-term investment. Today’s report doesn’t soothe my doubts. Although sales rose 8.7% compared to the equivalent period last year, the increase is down to the opening of six new sites. Like-for-like sales actually declined by 0.6%, which suggests a less vibrant outcome than the headline figure would lead us to believe. In fact, adjusted earnings per share tumbled 11% and the directors put a brave face on things by holding the final dividend flat.

What really worries me is the long list of justifications for the poor performance such as “the uncertainty following corporate activity, management change, extremes of weather and the FIFA World Cup.” Ok, the company was subject to a takeover offer that fell through and key management including the CEO quit, but if the customers were packing the bars through the period, I reckon sales and profits would have been more robust, whatever was going on in the back rooms.

I’m wary that fickle customers may already be growing tired of the firm’s concept, so, despite my bullish article earlier in the year, I’ve changed my mind. I can no longer see the point of taking the risk of buying shares in Revolution Bars Group and would much rather go for a proven winner like mid-cap pub operator JD Wetherspoon (LSE: JD).

Piling them in

The Wetherspoon concept has far wider appeal and more or less operates at the other end of the scale from the ‘premium’ approach taken by Revolution Bars. In fact, Wetherspoon bases its business model on selling ‘cheap’, and I think a value proposition like that is far more suitable for a long-term investment horizon because the concept is unlikely to out of fashion.

One of the things I like about the firm’s annual reports is the way the firm lists its annual performance right from the beginning of operations in a similar way that Warren Buffett does with his firm Berkshire Hathaway. It makes interesting reading. In 1984 the firm turned over £818,000 for a pre-tax loss of £7,000, and in 2018 it saw revenue of almost £1.7bn and made a pre-tax profit of more than £107m.

Since the firm came to the stock market, shareholders have been rewarded with multi-bagging gains, and I think there’s more to come in the years ahead. Wetherspoon strikes me as a decent bet for long-term growth and I think the stock is well worth your research time right now.

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However, as the year has progressed, analysts have become more positive on the outlook for the company — no doubt helped by its better than expected trading performance. 

Sales growth 

Helped by England’s performance in the World Cup, and the fantastic summer weather we’ve been having, today Spoon’s reported a 5.2% rise in same-store sales for the 10 weeks to July 8. 

As analysts plug these figures into their valuation models, it looks as if the company could see substantial growth upgrades in the weeks and months ahead. Prior to today, the City had already upgraded its full-year EPS growth target to 6.9% for 2018. 

No matter what you think of its Brexit-loving boss Tim Martin, he is managing to successfully steer the group through a tough trading environment. Rising costs are eating away at the pub industry’s margins and at the same time, economists are becoming increasingly concerned about the health of the UK consumer’s wallet.

And while the industry has benefited from hot weather over the summer, and the World Cup over the past few months, we still don’t know what’s going to happen throughout the rest of the year.

Cautious outlook 

For its part, the company has adopted a cautious stance. As well as toasting its summer sales growth, Tim Martin also warned today that the group will be facing “considerable cost increases next year, in areas including business rates, the sugar tax, utility taxes and wages.“

For investors, this warning will come as no surprise. Martin has a reputation for underpromising and overdelivering. He issued a similar warning in 2015, 2016, 2017 and at the beginning of this year. On every single occasion, the business has been able to mitigate rising costs by streamlining or through improved sales figures. 

For example, to help offset cost pressures, the group is buying freeholds and renovating existing sites to attract new customers. It has also introduced new menu offerings such as pizza and a mobile app so customers can order drinks (as well as food) without having to go to the bar. 

Fail to prepare, prepare to fail

I believe Martin’s continual cautious outlook has helped Spoon’s stay ahead of the competition, and as long as the business tries to improve continually, growth should follow. 

Indeed, growing EPS have helped push the shares higher by 100% over the past two years.

The group has enjoyed steadily rising earnings over the past five years, with EPS up from 46.2p in 2013 to 70.8p last year. Analysts expect EPS of 75.2p by 2019. 

Even though I’m positive on the outlook for the shares, the one thing that concerns me is the P/E multiple of 16.5. This is higher than I’d like personally, but I’d be willing to make an exception here because of the firm’s widely recognisable brand, innovative nature and history of growth. In fact, I believe there’s a strong chance the shares could go on to double again over the next few years.

The post Why this FTSE 250 growth champion could double your money appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.