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A value stock is a company whose share price has fallen below its long-term fair value. It is not an exact science to find a value stock, as it may make sense to say where the share price should be in the coming years. However, I saw one company that recently hit 52 weeks that I think is a contender.
The reasons for the fall
The company I am referring to JD Wetherspoon (LSE:JDW). It fell below 600p yesterday (5 November), taking the stock down 12% over the past year.
One of the short-term factors at play was the recent UK Budget announcement. Increases in employer national insurance contributions, increases in the living wage and other measures will set the firm’s cost base. Wetherspoons founder Sir Tim Martin said the company’s increase would be huge, with a total of £60m being spent on potential annual costs.
Of course, all businesses are affected by this, but the hospitality industry is considered one of the worst affected.
Another concern is debt levels, which rose from £1.06bn last year to £1.07bn in its annual results released last month. With a debt-to-equity ratio of 2.71, this is more than the 1 ratio that most companies aim for.
Why do I think it looks cheap
Considering last year’s financial results, it may seem strange that the share price is trading at such low levels. For example, in the latest trading update that came out today, it showed that sales for the first 14 weeks of the financial year were 5.9% higher than the same period last year.
Except for a small drop in hotel room sales, all areas of business were up. This includes bar sales up 5.7%, food up 5.7% and slot machines up 13.5%. This reflects a diverse revenue stream, rather than relying on one source to drive growth.
I also think it looks cheap when looking at the cash potential going forward. The business recently returned the budget. At 12p per share, it’s nothing to write home about right now. However, I expect this to grow in the coming years in line with finance. So having the opportunity to get huge returns based on the current share price looks attractive to me.
Finding value
I think the stock should bounce back in the coming year, based on investors looking at the Budget issues and focusing on core funds. However, I wouldn’t say it’s the best value stock in the index, given that the price-to-earnings ratio at 12.31 is close to my target price already. So, I think about allocating a little money here, but not a lot.
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