The Investment Column: Wetherspoon has right mix

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The Independent Online
The JD Wetherspoon juggernaut keeps motoring, with half-year figures to the end of January showing a 44 per cent rise in sales, pre-tax profits up 46 per cent to pounds 8.1m and earnings per share up 39 per cent at 20.6p.

The shares, some of the most highly rated on the whole market, have fallen back from the highs reached at the end of last year but at 1140p, down 2.5p yesterday, they have risen about eight-fold since the company floated four years ago.

The market loves growth stocks like Wetherspoon but is nervous about them and the company is right to stress that what investors think they see is what they actually get.

Depreciating pubs to the tune of pounds 50,000 a year each is more prudent than strictly necessary and certainly more prudent than any of its peers.

Importantly, that policy means cash flow is much stronger than earnings per share, always a good sign in a fast-growing company.

Wetherspoon is one of those shares that always looks expensive but never is as long as you have faith in the company's ability to continue growing earnings per share in excess of 30 per cent a year. A daunting price-earnings ratio is reined in to more comfortable levels as long as that continues. Fortunately at Wetherspoon there is every reason to believe it will.

Wetherspoon's earnings growth is driven by new openings, not like-for- like sales improvements, which at about 3 per cent are nothing spectacular. With only 146 pubs open at the start of the period, however, there is still plenty of scope for growth with the formula of big, music-free pubs with food all day and smoke-free areas seemingly what people want both outside the London heartland and in quite small towns. If Wetherspoon's pubs work in towns of as little as 15,000, as they seem to, then the company's target of 1,000 pubs is probably conservative.

On the basis of Merrill Lynch's forecast of pounds 18.5m profit this year and pounds 27.3m next time the shares trade on a prospective price-earnings ratio of 24 falling to 19. Buy.