Berenberg slashes target price on JD Wetherspoon

Having downgraded JD Wetherspoon in January, Berenberg thinks the stock could probably now be considered "too cheap", down roughly 45% since then, on the basis that its leading value-for-money offer was a "sustainable competitive advantage" and its medium-term earnings power ought to eventually return to pre-pandemic levels.

However, Berenberg said its confidence in this was "not complete", particularly because the company will now post a loss for the last 12 months, despite Covid-19 restrictions having been lifted.

"With earnings highly sensitive to small changes in volumes, price, and costs, we struggle to have conviction on the outlook, and hence reiterate our 'hold' rating," said the analysts.

The German bank said another major swing factor behind the company's profitability was management's decisions on pricing, with most companies in the sector putting up prices by "at least a mid-single-digit percentage", while Spoons opted to only increase prices "modestly" on some products and actually reduce them on many others.

"We understand its desire to rebuild demand and maintain its leading value-for-money position, but we think that it has enough of a price gap versus peers that it should be considering some more meaningful price increases to help offset inflationary cost pressures," said Berenberg.

Reporting by Iain Gilbert at Sharecast.com