logo-loader

JD Wetherspoon squeezed lower

Published: 07:00 27 Feb 2016 GMT

no_picture_pai

 

A glance at the above chart of the FTSE 100 shows it has been a volatile yet positive week for equities, as surging oil prices helped boost sentiment among investors.
Fears have waned about a slowing Chinese economy and its impact on global growth, while markets appear to have largely priced in the likelihood of prolonged ultra-low interest rates and their impact on the banking system.


Oil prices remained the focus of market action, as the extremely strong correlation between the price of a barrel and global stocks hit 80%. Brent crude rallied back to recent resistance at $36 a barrel, up over 30% since hitting a 12-year low last month.


The energy sector has taken some comfort from recent developments in the oil market, where Opec’s proposed output freeze at January’s level, has temporarily had the desired effect of shoring up prices.


That said, production remains at record levels and while key producers Iran and Iraq have indicated a willingness to cooperate, they stopped short of committing to production cuts. Analysts remain sceptical that a production freeze will materially tighten supply, keeping the price of crude and related currencies under downward pressure.


Economic news from the US was hardly reassuring as Markit’s non-manufacturing index showed service sector activity contracting this month for the first time since October 2013, a message consistent with the recent Institute for Supply Management’s non-manufacturing survey.


Meanwhile, the US Conference Board’s index of consumer confidence fell to 92.2 this month from a downwardly revised 97.8 in January, a bigger than expected drop. The German Ifo business sentiment survey also signalled a further deterioration in conditions, with the headline index falling to a 14-month low. 


The data suggests the financial market turmoil earlier this month was beginning to weigh more heavily on consumer confidence, yet healthy labour markets and income gains should push consumer confidence higher again once financial conditions stabilise.


On a domestic front, data revealed the UK economy grew by a solid 0.5% in the final quarter of 2015, but news of a surprise drop in business spending fanned fears of a slowdown in the months ahead. The Office for National Statistics said the economy grew 2.2% over the year, unchanged from the estimate published in January.


Exports struggled, manufacturing stagnated and business investment fell at the sharpest pace for almost two years, as concerns about the repercussions of possible UK exit from the EU weighed on sentiment. Sterling fell to its lowest level in six years, after Boris Johnson, London’s major, added his support to exit the Union.  


Technical analysis of the FTSE 100 depicts the recent choppy trading, with the index stuck between initial support at 5860 and resistance at 6060. The bulls will feel heartened that the downward trend line has been surpassed and rising oscillators have some way to go before becoming overbought, yet a close above 6060 is needed to confirm the break-out.


It is also worth mentioning the S&P 500, the world’s most influential barometer of equity investor sentiment, also remains range-bound between support at 1810 and resistance at 1950. A breach of this 140-point range is important, as it could trigger the next move up towards 2100 or a retracement back to 1600.


In conclusion, equities have recovered thanks to recent developments in the highly correlated oil market and a lack of news from China, thanks to a week-long Lunar New Year holiday. The macro-economic backdrop, however, remains uncertain and in order to get a sustained recovery, I believe the market either needs to fall further or remain choppy and directionless until the economic fundamentals and the oil price improve.


Any slowdown in consumer spending will have a direct impact on the leisure sector and after margins have been squeezed, falling sales is something discount pub operator JD Wetherspoon (Epic: JDW) could do without.      


Until recently the Watford-based company has defied the decline of the pub industry in Britain by charging low prices and extending opening hours, but JD Wetherspoon is facing rising wages on one side and competitors slashing prices on the other.


Last month, JD Wetherspoon said its annual profit would be at the low end of market expectations, its second warning in just three months. The immediate problem is the steady rise in the wages of its workforce, after Chancellor George Osborne announced a proposal to push up the minimum wage sharply for over 25 year olds. The government plans to raise the minimum wage from its current £6.70 an hour to more than £9 an hour by 2020.


JD Wetherspoon employs around 35,000 people and pay makes up about a third of the groups £1.4 billion operating base. The FTSE 250 pub operator has already started pushing up wages ahead of the April increase, with a 5% rise in October and a further 8% in July 2015, yet the company is sticking to its credentials by freezing food and drink prices.


Competition is becoming more intense, with several private equity groups funding a growing number of high street eateries, all vying for a share of the consumer wallet. Given the slowdown in consumer spending, many are now offering aggressive discounts and vouchers in an effort to win business.


JD Wetherspoon has already slowed its expansion plans in the face of fierce competition, with only five new pub openings and two sold in the six months to 24th January 2015. The company still plans to open about 10 pubs this year, but this down sharply from the 30 new pubs unveiled last year.


The net effect of falling profits and rising costs was felt as the operating margin fell to 6.3%, down 1.1% from the same stage last year and analysts slashed their pre-tax profit forecast for the year ending in July 2016 by 5% to £71 million. Profit last year was £77.8 million.


After five years of impressive industry defying growth, shareholders of the £850 million pub operator are faced with a premium rating of 15x earnings, as earnings go into reverse, while the 1.7% prospective yield will offer little support.

After five years of solid growth since the financial crisis, the two-year chart of Wetherspoon’s illustrates the pressure the business is under. The 50-day moving average has provided resistance to any strength, while the acute bearish divergence indicates momentum is languishing.
JD Wetherspoon are still rated at a premium to the sector, which I believe will continue to unwind this year, as deteriorating margins and heightened competition take their toll. At the time of writing the share price is 721.5p and I anticipate the recent downward spiral to continue, with near-term targets seen at 693p, 664p and 614p. Traders might consider a stop-loss above resistance at 752p to minimise risk.

This report was written by Michael Allen, equity specialist. The writer does not hold a position in JD Wetherspoon. The material in this report has come from web-based data sources and JD Wetherspoon’s corporate website.

Chesnara reports strong 2023 results with improved cash generation and...

Chesnara PLC (LSE:CSN) chief executive Steve Murray discusses the company's full-year results for 2023 with Proactive's Stephen Gunnion, describing them as strong and particularly highlighting £53 million in commercial cash generation and a dividend coverage of around 150%. The company has...

1 hour, 30 minutes ago