Market snapshot: interest rates and numbers from Wetherspoons

Our head of markets rounds up latest interest rate developments here and in the US and their implications. He also looks at the books of value pub chain Wetherspoons.

Markets made more measured progress as some of the investing dust clouds begin to clear.

Some uncertainty has been lifted with the path of interest rates becoming clearer on both sides of the pond. In addition, there is something of a “glass half-full” attitude emerging since, even after the projected rises, rates will still be low by historical standards. It remains to be seen whether the proposed rate rises will be sufficient to stifle inflation in the nearer term, but the purpose and clarity of thinking from the central banks is nonetheless being well-received by investors.

With the Chinese economy likely to be supported if necessary by some stimulus, it is the ongoing conflict between Russia and Ukraine which is the main plank of concern at present. Despite reported progress in talks between the two nations, the overarching uncertainty continues to spill over into commodity prices, and another surge has lifted the oil price once more, now standing ahead by 39% in the year to date.

Meanwhile, the major US indices are attempting to claw their way back, with the latest session resulting in gains driven from the likes of the technology, financial and consumer discretionary sectors. While the picture has improved this week, the Dow nonetheless remains down in the year to date by 5%, the S&P500 by 7% and the Nasdaq by 13%.

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The UK’s premier index remains a relative beacon of light on the global investment stage, with the FTSE100 currently back in positive territory, if only by just 0.1% in the year to date. Amid the volatility to the beginning of the year, the index has somewhat come back into vogue due to the relatively defensive nature of the index at a time when investors have sought safety rather than breakneck growth.

Wetherspoons (LSE:JDW) seems consigned to a slow grind back to some sort of normality. The chairman’s previously trenchant comments on the treatment of the industry as a whole have yet to level the playing field in terms of tax treatment between pubs and supermarkets. This was particularly highlighted during the pandemic when the supermarkets had that part of the field to themselves.

In terms of the results, there is a marked improvement from last year’s restriction-hit trading environment, but no signs that pre-pandemic levels have yet been restored. Revenues, for example, have risen by 87% compared to last year but are 13.5% down from two years ago. A pre-tax loss for the period of £21.3 million compares with a loss last year of £46.2 million, and a profit of £57.9 million in 2020.

In the meantime, a metric of concern is the operating margin, which was reported at just 0.1% as compared to 8.2% in 2020. Wetherspoons was famously able to operate on wafer-thin margins, but this development is the result of higher cost and inflationary pressures and will be the focus of repair from the management. Net debt has also risen to £920 million from £805 million in 2020, although in terms of the balance sheet, a property portfolio which is 70% freehold and which has some long-term fixed rates behind it provides some solace.

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The company has prudently decided to shy away from share buybacks or the reintroduction of a dividend for the time being. While trading patterns are normalising towards pre-pandemic levels, the company has much ground to recover.

The same could also be said of the share price, which has fallen 40% over the last year, as compared to a drop of just 3% for the wider FTSE250 index. Even so, with a potential cost of living crisis driving the spending habits of increasingly pressed consumers – which could play into Wetherspoon’s hands – the market consensus of the shares as a "buy" remains intact.