Wetherspoon's future is looking ale and hearty

Click to follow
The Independent Online

There's nothing like a good pint, and it's all the better if it's competitively priced. This attitude has done well for JD Wetherspoon, which has grown impressively since its flotation in 1992. The pub operator specialises in large, airy pubs that have no music and very cheap drinks – a strategy that has proved popular with both students and after-work drinkers.

Lately, however, Wetherspoon has encountered some hitches. It was hit earlier this year by its extravagant promotion of coffee in its pubs – cheap coffee producing very much less in the way of profits than cheap beer. But that's all behind it after a positive trading statement last week.

When it floated, the company had only 44 pubs. It now has 550. The plan is to get to 1,500 over the next 10 years, and it has marked out the spots around the UK where it thinks its concept will work. This should mean strong profit growth in the long term, but what some brokers are worried about is the growth after this period. Wetherspoon's profit margins have a ceiling because the drinks are so cheap, and this policy is an important part of its brand identity.

But there are other expansion plans in the offing. A new concept is the Lloyds No 1 chain of pubs, bought from Wolverhampton & Dudley. Takings at these pubs have been transformed, even though they are a new concept for Wetherspoon, being aimed at a younger market than its usual brand. They have music and often have late licences, although once again the drink prices are kept low. Currently there are only 10 Lloyds No 1 pubs, but the plan is for slow, careful expansion to see if the concept will take off.

Another possibility is a move into France. The company is already looking for properties in Calais and Lille and will again try a cautious expansion plan.

Despite its relatively high price compared with its peers (around 27 times earnings), the stock is a good one to tuck away. Wetherspoon has strong management and a clear strategy, and is currently performing well despite the economic situation. Even in a recession, people spend money on drink – and they would be more inclined to go to a Wetherspoon's pub than one that is too pricey.

Stockbroker Teather & Greenwood predicts a growth in pre-tax profits to £72m in 2004 – a 62 per cent jump from this year's figures – and with a 10-year plan in progress, profits can be expected to go higher. The shares have done well on last week's trading statement, so it may be worth while waiting until the price falls from the current level of 387p, but they remain an interesting play in the long term.