Are these high-flying stocks about to crash?
Shares of pub chain J D Wetherspoon (LSE: JDW) have risen by 35% over the last year. But the stock fell by 3% on Friday morning, after the group warned investors to expect rising costs and lower like-for-like sales over the next six months.
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This cautious outlook took the shine off a pretty strong set of interim results. Like-for-like sales rose by 3.3% during the 26 weeks to 22 January, while Wetherspoon's adjusted pre-tax profit was 42.8% higher at £51.4m.
Earnings per share for the period rose by 51.6% to 33.8p, suggesting that the firm should easily be able to hit full-year forecasts of 55.5p per share.
Has Wetherspoon peaked?
The outlook for further growth seems uncertain to me. According to the firm, total sales fell by 0.2% during the six weeks to 5 March, while like-for-like sales growth slowed to 2.7%.
Wetherspoon is no longer expanding, either. Twenty-three pubs were sold or closed during the first half, while only two were opened. The group's pub estate has fallen from 951 in July 2015, to 906 today.
Debt is another concern. Wetherspoon's net debt-to-EBITDA ratio was 3.46 times at the end of the first half. That's a historic high for the group, which acknowledged in 2016 that debt levels in recent years "have clearly involved significant risk".
Wetherspoon shares have risen by 130% over the last five years and currently trade on a forecast P/E of 17. Earnings per share are only expected to grow by 2.5% in 2017/18. In my view, the upside and downside risks are evenly balanced for this stock.
On this basis, I'd rate Wetherspoon as a hold. But were I a long-term shareholder, I'd probably want to sell some of my shares to lock-in a profit.
You could have your cake and eat it
Posh cake shop owner Patisserie Holdings (LSE: CAKE) has definitely not reached maturity. The group, whose Patisserie Valerie brand accounts for about 70% of sales, opened 21 new stores last year, taking its total to 184. Another 20 new branches are targeted for this year.
For investors, this is a simple and impressive story to understand. Unlike Wetherspoon, Patisserie Holdings has no debt. All store openings are funded from operating cash flow, with an average payback period of 23 months.
This allows the group to fund its own expansion, with impressive financial results. Patisserie Holdings generated an impressive return on capital employed (ROCE) figure of 21% last year.
ROCE is useful because it measures the profit that's generated relative to the money invested in a business. Companies with high ROCE can usually fund growth without borrowing. This is generally less risky than debt-funded expansion but also offers another advantage. When Patisserie Holdings' expansion starts to slow, cash flow currently used for opening new stores should be available for increased dividends and share buybacks, boosting shareholder returns.
The firm's earnings are expected to rise by about 16% this year and by a similar amount in 2017/18. This puts Patisserie Holdings' stock on a forecast P/E of 20, falling to 17.5 in 2017/18. There's a dividend yield of about 1.1% and the potential for significant growth. I'd definitely continue to hold at current levels, and would consider buying.
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Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Patisserie Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
