Sector spotlight Travel and leisure (part two)

Pub chains have taken a hammering during the Covid crisis, but I am wondering whether that has created some bargains. Let’s take a look.

Article updated: 10 June 2020 10:00am Author: Michael Baxter

Pub chains have taken a hammering during the Covid crisis, but I am wondering whether that has created some bargains. Let’s take a look.

Last week I took a look at a number of companies in the travel and leisure sector.  I am sticking with this sector today, but focusing on pub chains and related areas.

None of us have found the last few months easy, but the pub business has perhaps suffered more than most. I don’t know about you, but I am looking forward to returning to the pub. But I struggle to see how social distancing will work. Will staff all be wearing masks? Will pubs be arranged so that we can all keep a distance from each other? I know for example that JD Wetherspoon has invested heavily in making its pubs ready for reopening while minimising the risk of infection. But I struggle to imagine it.

Beer gardens, I get. But for me, pubs are places where you mingle — that’s what they are about.

On the other hand, once this crisis is all over, I for one would like to celebrate.

My biggest concern relates to the risk of a second wave. None of us know what will happen next with Covid, but it seems to me than any rational examination of what’s going on right now would suggest infection rates are about to pickup. If we don’t get a sharp rise in infections later this month, then I think that would be a miracle.

And even if we don’t, what about the autumn? By far and away the most serious phase with Spanish flu was the second one — which occurred in the autumn.

Unless Covid mutates in a way that makes it less infectious, less deadly, or we see a mass produced vaccine within a few months, or an effective treatment within a few months, I think we will see another lockdown in the autumn. It seems perfectly logical to me.

The markets are not pricing this risk in.

But what about individual pub chains? Might any of them eventually emerge stronger? After-all, if we see a lot of pub closures, those that are left might excel post-Covid, in part because they face less competition.

So let’s look at some specific companies.

JD Wetherspoon

The fact, is JD Wetherspoon’s share price has seen an exceptional performance over time. Shares are are up more than 20-fold since stock market debut 27 years ago. Pre-Covid, shares were up roughly three-fold over ten years and two-fold over five.

Of course, Covid has hit the share price, but it has since recovered quite a bit.

One interesting innovation introduced by the company is the ability to order drinks via app. That will help social distancing.

The company is raising money via a share placing, that will help. I suspect that the company will survive the crisis, but wonder whether the share price fully reflects the risk of a second Covid-phase. Watch Covid infections in two weeks time.

Period Share price
Current share price 1,147p
Year high 1,678p
Year low 559p
12-month high 1,734p (December 2019)
All time high 1734p
Share price five years ago 798p
Share price ten years ago 513p
Share price 1993 48p

Marston's

Pubs might be suffering, but brewers? not so much.

I have this weird personal thing, that I only drink ale in pubs. At home I opt for lager, something I rarely buy in the pub.

Maybe I am typical and that is why Marston’s shares have been hit so hard — despite the brewery arm to the business, which focuses on ales and premium beers (Hobgoblin and Wainwright brands, for example.)

But now its brewery arm is merging with the UK arm of Carlsberg to form a new brewery business. Marston’s will have a 40% stake in the new venture.

Ralph Findlay, chief executive, was quoted in the FT saying: “We had built a great [brewing] business but had not been able to convey the value of that within the Marston’s business.” 

I get that argument.

It seems to me that even if the pubs, including Pitcher & Piano, take a hit from a second Covid phase, the new brewery business could do well.

Period Share price
Current share price 69p
Year high 128p
Year low 22p
12-month high 131p (September 2019)
All-time high Over 300p (2007)

Mitchells & Butlers

Mitchells & Butlers, I read, has been given a kind of free pass (well maybe not free, entirely), but it was given more time to meet its latest credit commitments.

We all know why, and it is down to bad luck, but it is not a good time for a pub business to heavily indebted.

Period Share price
Current share price 197p
Year high 450p 
Year low 100p
12-month high 486p (December)
All time high Over 850p (2007)

Whitbread PLC

Although the performance of Whitbread shares had been disappointing over the last five years, the longer term showing has been pretty good. Pre-Covid, shares were up around nine-fold from stock market debut in the mid 1990s, and up around six-fold over the last decade.

Even if you compare long-term performance with the current price it has been pretty good.

It goes to show, if you invest in good companies over the long term, then economic stocks don’t dent performance too badly. I would describe Whitbread as a good company, with a very long tradition. It was the world’s biggest brewery back in the 1780s, when you could get a pint for a few pennies, or less. (I remember it well).

With a market cap in excess of £3.5bn, it’s a big company, in fact it’s the UK’s largest hospitality company. It proudly boasts and owns Premier Inn, Beefeater, Brewers Fayre, Table Table and Bar+Block.

Actually, almost as interesting is who the company used to own — Costa Coffee, David Lloyd Leisure, Britvic, Pizza Hut and UK franchise of TGI Fridays.

Its latest results were out a few days ago. Pre-tax profit dropped 8.2 per cent to £358.

The company stated: “Covid-19 is expected to result in a very material loss of revenue during 2021 and, despite the actions the group is taking, this is likely, given the group's high fixed and semi-variable costs, to have a material impact on earnings which may result in the group not making any profit during the financial year, with the clear possibility that it is materially loss-making during that period.”

On the other hand, the company raised a billion pounds to strengthen its balance sheet.

For me there are two question marks. How will the company cope if there is a second Covid wave, and how popular will its hotel chains be post-Covid?

Will hotels be so popular post-Covid, especially for business travel, if we continue to conduct more business meetings by Zoom?

But there is something else and this is far more positive. The company reckons that there are going to be bargains out there — opportunities for expansion at extremely good value. The billion pounds isn’t only being spent on ensuring it has sufficient cash buffers, it is being spent on this opportunistic expansion. I like the sound of that.

Period Share price
Current share price 2,715p
Year high 4,200p
Year low 1,800p
12-month high 4,262p (December)
All time high Over 4,600p (2015)
1995 price 483p

Young & Co

Young & Co is another strong performer over the long term, shares are up ten-fold since the mid-1990s.

Things seemed to be going well before the virus struck. Revenue was up 2.6 per cent to the end of March, that might not seem like much, but when you consider the lockdown began two weeks before the end of this period, I don’t think that was bad.

Chief executive Patrick Dardis said: 'We are confident with the steps we have taken to safeguard our business from the immediate threat of coronavirus. The board expects the business to be in a position to return to profitable growth when this unprecedented period is at an end and conditions allow, and we remain confident in our proven strategy.”

The company has been pretty bold, in my opinion, and decided not to open while two metre social distancing rules are in place. As a result, it won’t open until August.

Mr Dardis said: “With the pressure on the hospitals and police it’s not right. You have to think about the consequences of serving alcohol to people in pints who will then go to parks and drink.”

It’s good to hear company bosses making arguments like that.

I still worry about a second wave though.

The company has been around since 1831, and as a long-term play, it may well be a fairly good investment. I am worried about its short-term performance, however.

Period Share price
Current share price 1,140p
Year high 1,655p
Year low 900p
12-month high 1,800p (approx) (June)
All time high 1,850p (May 2019)

*note all figures in the tables are approximate. 


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

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Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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