JD Wetherspoon analysis

Extract

[...] A competitor organisation wishes to buy 15% of your company's shares. Estimate the value of a 15% stake, using at least two valuation methods, showing and explaining your workings, and analysing the difference/relationship between your valuations. 4. An elderly [aged 85] relative of yours has asked you whether they should invest in the company's shares. Your relative is looking to minimise risk and maximise income. Advise them accordingly. Introduction JD Wetherspoon is national chain of public houses, bars and hotels across the United Kingdom and Ireland. [...]

[...] Figure: Return on Equity- Wetherspoon vs. competitors: Restaurant Group PLC[18] & Revolution Bar Group PLC[19]. Source: Idem The figure above uses the return on invested capital, computed as the return the firm makes from every unit of capital it has invested in its balance sheet. It can be readily inferred from the figure that the Restaurant Group also exhibits high levels of RoI at a much higher level compared against Wetherspoon and the Revolution Bars, which points to a more efficiency policy in allocating capital to profitable investment and generating high returns. [...]

[...] For instance, we interpret the FY2017 Days Sales inventory for Wetherspoon of 5.06 as the average number of days it takes to sell inventory. The figure below reports DSI for Wetherspoon and its competitors for the period 2008-2017 Figure: Return on Equity- Wetherspoon vs. competitors: Restaurant Group PLC[21] & Revolution Bar Group PLC[22]. Source: Idem Wetherspoon is not as efficient as its main competitor, the Restaurant Group, since the latter has an average DSI of less than 5 days, whereas JDW achieved only recently a DSI of 5. [...]

[...] Figure: Median EBIT margin per market segmentation: 2013-2016 Source: Deloitte Consumer Industrial Products, Casual Dining Market in the UK In fact, the decline in EBIT margins has been concentred mainly on the premium casual chains, such as Loch Fyne and Hawksmoor, whose small number of sites make them vulnerable to changes in customer flows. Midmarket chains, to which Wetherspoon can be identified, have also experience a slight decline in their own median EBIT margins, and though these are slightly above Wetherspoon's own figures, the trend is definitely in the latter's favour, since it has managed to mitigate the common factors adversely affecting their bottom lines. Figure :Stock Market performance: Wetherspoon (blue), Restaurant Group Revolution Bars Group (Yellow) and the FTSE 100 (March 2014-March 2018) Source: Yahoo Finance retrieved on March 17th 2018. [...]

[...] Advise them accordingly. As a general rule, private investors should be wary from investing all their savings into one stock, especially if they are intent on minimising risk and maximising income. The first step would be to build a portfolio of stocks and bonds whose returns can be maximised with respect to risk using the so-called CAPM Capital Asset Pricing Model[25]. The portfolio has the inherent advantage of minimising risk through diversification. Corporate finance values risk as variance in market returns. [...]