Shares in JD Wetherspoon (LSE:JDW) have underperformed the FTSE 250 this year. The stock’s down 23%, compared to a 7% gain for the index.
There are reasons for this and I think the share price could have further to fall. But I won’t keep anyone in suspense – I’ve been adding to my investment at today’s prices.
Profit warning?
The Budget isn’t the only reason the stock has been under pressure, but it has been a big factor. Chairman Tim Martin told the Financial Times he expected around £60m in cost increases. It’s easy to see why investors viewed this negatively. It isn’t a profit warning as such, but with the exception of 2019, £60m is Wetherspoon’s highest annual net income over the last 10 years.
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At first sight, it looks like the company’s profits might go to zero, but it’s not as straightforward as this. The most obvious strategy for offsetting higher costs is increasing prices to customers. This is a risky business though, especially for a company with a brand built on customer value. And that’s why the shares have been falling recently.
Is it all bad?
Higher costs aren’t good for any business, but the Wetherspoon’s chairman said something else that caught my attention. It was the following:
“All hospitality businesses, we believe, plan to increase prices as a result.”
He might be right — both Fuller, Smith & Turner and Young & Co’s Brewery have warned of price increases. But this indicates to me that the company’s competitive position isn’t under threat.
In my view, the firm’s long-term success comes down to its ability to charge lower prices than its competitors. So the rest of the industry having to increase prices is a big help with this. Wetherspoon already has a price gap to its nearest competitors. And this gives it more scope to increase prices than its rivals without compromising its position as the best value around.
Long-term investing
The key to all of this is the fact I’m not taking a guess about where the share price is going over the next couple of months, or even years. I’m investing for the long term.
It wouldn’t surprise me at all if Wetherspoon’s shares continued to fall in the short term. Sales have been growing and margins have widened, but investors haven’t been excited by this.
Fair enough – they don’t have to be. But I think the share price is attractive at the moment given the company’s long-term strengths, so I’ve been adding to my existing investment.
I’ve no idea how far the stock might fall, but that isn’t important from my perspective. What matters is whether the stock’s cheap enough right now to ultimately provide a good return.
I’m a buyer
I think shares in JD Wetherspoon offer good value at the moment, which is why I’ve been buying. The short-term challenge is real and investors shouldn’t underestimate this.
Equally though, it would be a mistake to miss the bigger picture here. In my view, this is that the company’s competitive position is strengthening, which should be a long-term advantage.
