JD Wetherspoon: cheap but indebted

graeme at 8:13 a.m. Wed 04 Nov 2009

JD Wetherspoon’s first quarter trading update reports near flat like-for-like sales (+0.3%) with total sales increasing 4.5%.

The pub chains (Wetherspoons and Lloyd’s No. 1) continue to expand with seven pubs open in the quarter, and a target of 40 for the financial year.

Following its strong increase in profit last year (pre-exceptional EPS + 18%, free cash flow +41%) on sales growth of 5.2% (1.2% like-for-like), the performance is satisfactory.

At 465p, Wetherspoon is trading on a historical PE of 14× but a free cash flow/share of just 6.5×. One concern is that the company, is heavily indebted, albeit less so than many others in the sector, with gearing (debt/total assets) of 80%. Wetherspoon has ceased paying dividends in order to reduce debt. The fact that it remains cash generative is re-assuring and it would require a severe deterioration to make debt service a problem.

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