James Moore: Pubs enjoyed the summer of sport, but it won't last

The one-off boost from the summer of sport won't be repeated; the shares are due a fall
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At the beginning of June I sought to find the likely stock market winners from the coming summer of sport. As highlighted over the last couple of weeks, this column medalled: bookies and sports shops were largely winners, if you bought them at the beginning of June.

But what about the businesses to duck? I suggested avoiding pub companies based on the theory that economic weakness, the rising cost of a pint, England's generally rotten performances in football tournaments, and the Olympics not really being a "pub" event would keep people at home.

That medal I mentioned? Only a silver, because JD Wetherspoon's numbers on Friday told a very different story and the shares have shot up since the original column.

While England's footballers did what they always do, falling flat on their overpaid faces in a penalty shoot out, Team GB showed how it should be done by bagging a hatful of golds.

Wetherspoon's showed the Olympics on its pub TV screens and the punters responded. The same held true for the Paralympics.

In the six weeks to 9 September, sales at premises open at least a year increased by 8.4 per cent. Total sales (including acquisitions and openings) increasing by 12.8 per cent.

Earnings for the year ending 29 July showed a healthy rise in operating profits (up 5 per cent) although a number of one-offs meant that pre-tax profits showed a slight fall.

Debt increased a bit – up £25m to £463m – as a result of new openings and refurbishing older pubs. There's room for more borrowing too, although I'd be a little concerned about it rising too much more.

Wetherspoon's, which operates 850 pubs, mainly in town centres, now trades on 11 times 2013 forecast earnings, yielding a mere 2.8 per cent. The company says it is suffering from the fact that it has to pay far more tax than supermarkets and the sector is a popular target for even more as a result of George Osborne's stealth taxes. It's not just New Labour that indulges in those little nasties.

If you ignored my advice and stuck with this company, well done. Now reap the rewards. Take profits and celebrate with a pint. The one-off boost from the summer of sport won't be repeated; the outlook is cloudy and the shares are due a fall.

The larger Greene King, by contrast, didn't enjoy much of a boost from the Games. Its premises in the suburbs did pretty well, but that was offset by London; the City and the West End being noticeably quiet. In its recent trading statement the company said it was confident about the future even though consumer confidence could remain "subdued".

Greene King has also had a good run and trades on 10.4 times forecast earnings for the year to April 2013, yielding a shade under 4.5 per cent.

If you want pub companies in your portfolio, you could do a lot worse than either Greene King or JD Wetherspoon, but as with JD I'd be inclined to cash in on Greene King while the going's good.

The one pub group I have consistently recommended (because it's shares have been going cheap) is Mitchells & Butlers, which was first highlighted back on 10 February at 279p. Having fallen in the summer, the shares have now surpassed that level and are beginning to look like they might take a pop at the 300p barrier soon.

M&B is still inexpensive compared with the competition at a shade below 9.5 times forecast earnings for the year to the end of this month, falling to 8.6 times next year.

It's just ended an 18-month search for a chief executive, having raided rival Marston's for the latter's chief operating officer, Alistair Darby, who'd been considered a candidate for the top job at his old employer.

M&B represents a risk for investors. It's the sort of company for which the sobriquet "troubled" is never far away, largely because of the uncertainty over its future. A bid best described as a joke was tabled last year by Joe Lewis, the currency trader who is still a big shareholder, and it was rightly rebuffed.

Mr Darby, who was on a shade over £400,000 at his old shop, is going to have to earn the chunky pay rise he'll receive as a result. His seat could be a hot one.

I'm bearish on the pub sector generally for all the reasons discussed above. All the same, M&B is one I might just be inclined to hold on to as a recovery play. But be prepared for a bumpy ride, which might be in the wrong direction before it heads upwards again.

As for the rest, I've long been a sceptic about Punch and Spirit, which have been shackled by debt, not to mention all the other problems. Fuller Smith & Turner is a great company and I'd buy if it wasn't for the sky-high rating (17 times forecast earnings for the year ending 31 March). Nip in if the shares fall. Marston's would also be of some interest if (as I expect) the sector comes off the boil a bit before the new year.

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