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Wetherspoon: buybacks, free cash flow machine, owner-operator

I think the first time I heard the name Tim Martin, chairman and founder at JD Wetherspoon, was at MOI Global’s Latticework conference in September.


William Thorndike, author of The Outsiders, noted that he would like to do an expanded edition of the book with one to two chapters on international CEOs. Then he said:


“I’m actively soliciting any ideas, so if you have any, please let me know.

Among the candidates I find interesting is a guy named Tim Martin, who runs a UK chain of pubs called JD Wetherspoon. It’s an extremely mundane business, not to mention it has been shrinking over the last 20 years. Still, he’s generated extraordinary returns through repurchases, greenfields, and acquisitions, but very prudently.”


Indeed he has. In the 2018 annual report, Martin notes:


“Since our flotation in 1992, earnings per share before exceptional items have grown by an average of 15.4% per annum and free cash flow per share by an average of 15.5%.”


And the stock price? Up roughly 30x. In the last three years, it’s doubled.


I heard Tim Martin’s name again when I met with Peter Hollis for lunch in May. Hollis manages the Moray Place Investment Company. He has an admirable record and a sensible, long-term approach. Plus he’s a nice guy on top of it all. He also writes good letters. You can check them out here).


Hollis, knowing my fondness for owner-operators, told me to look at Wetherspoon. He told me about Tim Martin and laid out the general thesis (which I’ll get to in a minute).


Later, I remembered another UK-based investor, Andrew Hollingworth founder of Holland Advisors, had written up Wetherspoon on his site. (See his company research here).


I met Andrew in Toronto, after the Fairfax Financial annual meeting in April. A colleague of his discovered my blog. He saw we had a similar investment approach and, eerily, seemed to be in some of the same names. So, of course, we had to meet.


As it turns out, Andrew has been in Wetherspoon for a long time. He shared with me his report from July 2012:


“We believe we may have found another high quality UK consumer franchise with a wide and growing moat. This one charges industry smashing prices that others cannot match, but only has a 1.5% market share. As such we wonder if this is what a snowball at the top of long hill looks like?”


The stock is up more than 3X since. As my understated UK-friends might say, that’s a rather good call.


It’s remarkable how much of that 2012 report holds up today:


“In Wetherspoon, we believe we have found a business that has successfully applied the tried- and-tested formula of some of the world’s greatest low-cost retailers to the UK pub market:


* An unmatched depth and breadth of merchandise

* The lowest operating costs among its peers

* Shrewd buying power via huge volumes (which, given the negative working capital characteristics of the business, throws-off huge cash flows for equity owners)

* Gross margins (and prices) far below the competition

* Friendly and efficient service, consistently”


All of this is still true, so far as I can tell, and sums up the general thesis. Andrew updated his views on Wetherspoon most recently in November:


“We stand by our past work on the company and think it one of the lowest risk compounders we can find today, We think equity holders can look forward to IRRs of 11-16% pa for many years to come.* – Our money is on the higher figure.”


The asterisk refers to a footnote, which says that their estimated returns assume only 2% annual like-for-like sales growth. “JDW’s target of 50% higher existing estate sales in 10 years suggests this is far too low.”


Intrigued by all of this, I finally started to read Tim Martin’s annual letters. I wish I had found him sooner.


His letters are Buffett-esque in at least one way. Every year his letter begins with a table that looks much like Berkshire’s. Except his focus is on free cash flow per share. Yes, per share. Right away, I liked this guy.


And you can’t help but admire the capital allocation. It’s a page out of the Outsider’s cookbook. Wetherspoon is a devourer of its own shares. Since 2014, share count is down 14%. Longer-term, it’s even more impressive. In 2002, there were 214 million shares. Today, less than half that.


And Martin’s stake continues to rise:


“Over the last 12 years, my shareholding has increased from 21.2% to 31.9%, as a result of the company’s share ‘buybacks’.”


Lots of skin the game. And Tim Martin is only 64. So he could be doing this for many years yet.


Anyway, there is a lot to like here.


Woodlock House does not own JD Wetherspoon. Not yet. The leverage is higher than what I’d like for this kind of business, especially when you include leases. Am I being too cautious? Wetherspoon generated plenty of free cash flow, even during the global financial crisis. Moreover, Martin seems mindful of the risk that something bad like that may happen again. In his annual letter, he writes:


“Wetherspoon has a significant competitive edge in governance, since all of our directors, bar one, were in situ at the time of the last financial crisis.”


Also, I’m still noodling over the valuation. Is today’s price a fair price? Forecasting present free cash flows, even with modest growth, out ten years would seem to imply a solid double-digit return.


Regardless, JD Wetherspoon is a remarkable business. And Tim Martin fits the coveted “Outsider” mold.


Do you have a favorite candidate for The Outsiders not based in the US? Send it in. I’ll compile the results and publish them in a future blog post.


Write me: info [at] woodlockhousefamilycapital.com


Thanks for reading.


***

Published July 10, 2019

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