The Wetherspoon share price just got a budget boost. Should I buy?

Shelves holding drinks bottles

JD Wetherspoon (LSE: JDW) shares started 2021 well, but since March they’ve been on a steady slide. At the time of writing Wednesday, we are looking at a 12-month gain of just 9%. The FTSE 250, meanwhile, has climbed 30%. But after an early afternoon spike, the Wetherspoon share price has jumped 5%.

So what’s happening? It can’t be mere coincidence that the share price boost comes just after Rishi Sunak’s budget speech. The chancellor told us that the UK economy is recovering faster from the Covid downturn than its major competitors.

According to the Office for Budget Responsibility (OBR), we should now see economic growth in 2021 of 6.5%. That’s a significant improvement on previous forecasts of around 4%, but it is tempered a little by rising inflation. September saw prices rise by 3.1% year on year. And the OBR has reiterated predictions of 4% by the end of the year.

Oh, and the budget has cut taxes on beer and lowered business rates for the retail, hospitality, and leisure sectors. The leisure sector was one of the hardest hit during the pandemic. So on top of these specific targeted budget measures, any improvement in our economic outlook would suggest more people will be heading back to the pubs and clubs.

Leisure sector boost

Others in the sector are responding nicely too. As I write, shares in pub group Marstons are up 3% on the day, and Mitchells & Butlers shares are up 4%. In contract to the Wetherspoon share price, though, Marstons shareholders have enjoyed a 12-month gain of 80%, and M&B shares are up 110%.

That apparent underperformance of JD Wetherspoon over the past year is a bit misleading. The shares did not crash as hard as the other two when the pandemic hit, and had a better 2020 all round. Looking back over the past two years, all three have put in very similar performances with gains of around 30%-33%.

Wetherspoon share price valuation

Anyway, what’s the Wetherspoons valuation looking like now? And does it deserve a place on my Stocks and Shares ISA buy list?

After two years of losses, it’s hard to work out a valuation. But should the pub chain get back to 2019 profit levels, the current Wetherspoon share price would suggest a price-to-earnings multiple of around 13. The stock ended the 2019 year on a P/E of close to 20, so on that measure I might think the shares cheap.

But that’s ignoring changes to the balance sheet. The 2020-21 year ended with net debt (excluding derivatives) of £845.5m. That was only a relatively small increase over the 2020 level of £817m. But that was up from the £737m recorded for 2019. So we’re looking at a net debt increase of nearly 15% over the two Covid-affected years.

High debt

That’s a way better performance than many balance sheets that were hammered during the crash. But it’s still a high level of debt for a company with a market cap of around £1.3bn. On a quick calculation, that suggests an enterprise value P/E of around 20. And that doesn’t look like such a big bargain.

The upside is that if we really see the economic progress that’s predicted, we could be in for a lengthy bullish period for the leisure sector. But the high debt level still keeps me away.

The post The Wetherspoon share price just got a budget boost. Should I buy? appeared first on The Motley Fool UK.

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More reading

  • Why is the JD Wetherspoon (JDW) share price rising?
  • Has the JD Wetherspoon (JDW) share price hit rock bottom?

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Marstons. 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.