2 quality UK stocks trading below intrinsic value?

Jet2 (LSE:JET2) and JD Wetherspoon (LSE:JDW) look like the kind of stocks value investors should be going crazy for. At first sight, they’re unbelievably cheap. 

In both cases, the situation is more complex than it seems. But I think anyone looking for buying opportunities should give both of these stocks a closer look.

Valuations

One of the key pillars of value investing is to look for a margin of safety in case things go wrong. And at today’s prices, that looks very easy to find with both Jet2 and JD Wetherspoon.

Jet2 has a market value of £2.28bn. But its latest update reported £2bn in net cash on its balance sheet, which covers virtually all of this straight away. 

With JD Wetherspoon, the company has a market value of £750m and another £725m in net debt. This, however, is almost entirely offset by £1.4bn in property, plant, and equipment.

That means the stock market isn’t giving these businesses much credit for any future cash they generate. So, are these huge opportunities or too good to be true?

Jet2: cash is king?

The catch with Jet2 is that a lot of the cash on its balance sheet is already accounted for. Around £1.3bn is offset by what’s known as deferred revenues. 

This represents cash the firm has received up front but hasn’t yet provided the service for. In other words, holidays that people have booked but haven’t yet gone on. 

Deferred revenues don’t show up as debt, so they don’t affect the firm’s net cash position. But they do change the value equation for investors and means it’s not the bargain it first seems. 

Oil prices surging higher represent an ongoing and obvious risk. But I think Jet2’s impressive growth and new Gatwick operations, though, mean the stock is worth considering at today’s prices.

JD Wetherspoon: unlocking value?

With JD Wetherspoon, the reverse might actually be true. The value of the firm’s properties on its balance sheet could actually be understated based on how often it updates them. 

Investors, though, need to consider how realistic it is that the company is going to sell its properties to unlock their value. While I think it’s more likely than most, I don’t give it a high probability. 

That means it’s down to the firm’s cash flows. And I’m much more optimistic here with that big property portfolio keeping leases down to contribute to the lowest costs in the industry.

Hospitality has been under pressure from rising costs and this remains a risk. But pubs have been doing surprisingly well – and I think JD Wetherspoon is the best in the business.

Opportunities?

An initial look at Jet2 and JD Wetherspoon makes them look like investments with huge margins of safety. Alas, investing isn’t quite so straightforward.

My own view is that both companies have something in common. They’re some of the best operators in industries that have been historically difficult to do well in.

Cost pressures in both airlines and hospitality have been and remain challenges. But at times like this, I think investors could do well by taking a look at some of the top names.

The post 2 quality UK stocks trading below intrinsic value? appeared first on The Motley Fool UK.

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Stephen Wright has positions in J D Wetherspoon Plc. The Motley Fool UK has recommended Jet2 Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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