If I had reviewed FTSE 250 incumbent JD Wetherspoon (LSE: JDW) as a stock to buy a couple of years ago, I’d have run for the hills.
Well, times change, and I now think it could be a bit of a diamond in the rough after recent developments.
I reckon it’s worth taking a closer look at the stock. Here’s why.
Pubs galore
Everyone loves going to the pub, right? Well, despite this sentiment, JD Wetherspoon has appeared to be a business on the ropes in recent years. Naturally, the pandemic didn’t help, and borrowing to keep the lights on damaged the firm’s balance sheet.
The shares aren’t exactly flying either, up just 2% over a 12-month period from 705p at this time last year, to current levels of 722p. Over a five-year period they’re down 52% from 1,533p to current levels.
It’s fair to say that the shares haven’t really recovered from the mess the pandemic brought on.
Change in tack and recovery
A huge change in direction in the firm’s modus operandi could be a money spinner for the business. Plus, it could be a great long-term way for the shares to recover, and offer great shareholder value in the coming years.
How, do you ask? Well, JD Wetherspoon has been quietly disposing of pubs it doesn’t own outright. This is because it can help keep costs down and remain attractive to customers as a value proposition. Rental liabilities coming down is good for the firm’s long-term future. For context, the business now owns 71% of its real estate, compared to 47% a decade ago.
I’ll admit I don’t think this approach alone will help the company return to former glories. It needs the hospitality sector to recover as well. However, there’s been signs of that too. A pre-close trading update issued in July alluded to this. The update said the 10 weeks to 7 July saw a like-for-like sales increase of 5.8%, and a year-to-date hike of 7.7%. This is on the back of other promising updates recently.
Risks to be wary of
Despite looking to keep costs down like real estate, it can’t control other expenses such as wage inflation and energy costs. Both aspects could dent earnings, and could result in price hikes. The latter is certainly not good news as many customers choose to frequent JD Wetherspoon establishments for their attractive value offering of food and drink.
A shorter-term risk is that of recent economic turbulence. Higher interest rates and inflation have created a cost-of-living crisis. As consumers battle with higher essential living costs, going to the pub may not be something many can do as often as they’d like. JD Wetherspoon could see earnings impacted.
Overall, I believe there’s a potential opportunity for investors to consider here. My view is that this could be a long-term endeavour, and that the turnaround and eventual recovery isn’t a quick process.
Personally, I’ll be watching developments closely. The firm’s next update is due early October, which could help me decide whether I’ll buy some shares soon.
The post This FTSE 250 stock might be an underrated gem for investors to consider buying appeared first on The Motley Fool UK.
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Sumayya Mansoor has no position in any of the shares 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.
