Leisure stocks — particularly those that offer relatively inexpensive experiences — can be fairly resilient investments, certainly during uncertain economic times. After all, amid all the doom and gloom, people still want to be entertained.
So, how should investors view new-stock-on-the-block Hollywood Bowl (LSE: BOWL)? Let’s take a look at today’s full-year figures.
Maiden results
Total revenue for the UK’s largest 10-pin bowling operator grew just under 24% to £106.6m in the year ending 30th September, with a rise of 6.8% on like-for-like revenues. The business saw a 6.3% increase in the average spend per game and a 16.3% jump in the volume of games played. Despite this, pre-tax profits fell from £4.8m to £2.6m, thanks largely to exceptional items including costs relating to the company’s recent IPO.
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In addition to confirming that the business was trading in line with board expectations, CEO Stephen Burns reflected that 2016 had been a “transformational year” for the company and that Hollywood Bowl “has a promising future as a listed business”. One particular operational highlight was the acquisition of Bowlplex — a move which allowed the £278m cap to add 10 new sites to its estate. Apparently, these centres are now delivering returns ‘ahead of expectations”.
Do these fairly positive figures set Hollywood Bowl up for a knockout 2017? I’m not so sure. While 10-pin bowling clearly still holds appeal for many, the company’s easily replicated business model means competition will remain fierce. Moreover, I’m concerned by the amount of debt Hollywood Bowl has on its books, even with net profits expected to rise to £16m in 2017.
While the company may be of interest to small-cap afficionados, I think there are better, lower-risk shares out there, particularly for those concerned by how Brexit will impact on their holdings. These include theme park owner, Merlin Entertainments (LSE: MERL) and cinema operator, Cineworld (LSE: CINE).
Universal appeal
Oddly enough, the share price graph for Merlin over the last year isn’t dissimilar to the sort of ride you might expect from one of its roller coasters. Reaching a high of 490p back in September, shares have now dipped to the 425p mark, despite the company reporting a strong Halloween period and good progress on two new attractions in Dubai and Istanbul. A forecast price-to-earnings ratio (P/E) of 19 coupled with a disappointingly low yield of 1.9% for 2017 is unlikely to get investors queueing for the shares.
Nevertheless, the big attraction of Merlin for me — aside from its portfolio of great brands — is its geographical diversification, something Hollywood Bowl doesn’t have. With sites around the world, the company isn’t overwhelmingly dependent on the UK for earnings. Operating margins are also significantly higher than those of the Hemel Hempstead-based company.
Cineworld is another option for similar reasons. While not having quite the international reach of Merlin, the company’s operations in several European markets gives earnings a degree of protection. The universal appeal of movies is also highly unlikely to diminish, particularly with films such as Lego Batman, Kong and Star Wars Episode VIII all set for release.
At the current time, shares in the £1.5bn cap trade on a forecast P/E of just under 15 making it the cheapest of all three to acquire. The 3.8% yield pencilled-in for 2017 is also better than that offered by both Merlin and Hollywood Bowl.
