For growth hunters, bowling behemoth Hollywood Bowl (LSE: BOWL) may not seem the most obvious stock choice.
The business is expected to endure a 20% earnings slide in the year to September 2017. But I believe Hollywood Bowl’s leading position in this niche leisure sector (controlling around a quarter of the country’s bowling lanes) should deliver rewards for patient investors.
It announced in last week’s market update that it “has traded well through the first half of the financial year,” with revenues leaping 7.8% year-on-year, or 1.2% on a like-for-like basis. This was despite Easter falling in the second half of the current fiscal period, unlike last year.
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Strike lucky
Hollywood Bowl’s perky half-time numbers underline the success of its site refreshment and expansion programme, moves designed to transform its centres into one-stop shops for amusement lovers.
The company advised that refurbishments at its recently-acquired Bowlplex centres “are continuing to trade ahead of our original expectations,” as are changes across the company’s other brands.
And Hollywood Bowl’s site expansion programme also offers plenty of earnings potential. The business expects to open three new sites in the current fiscal year in Derby, Southampton and Dagenham, and has six new centres in total in its pipeline up until 2020.
It is true that the economic implications of Brexit are likely to hang over the retail and leisure sectors for some time. But Hollywood Bowl’s position as one of the better value-for-money operators in the market should allow it to effectively hurdle these near-term troubles, while ongoing work to its estate should underpin splendid returns further out.
My enthusiasm is shared by the City, which expects Hollywood Bowl to recover from this year’s anticipated earnings drop with a 13% bounce in the next fiscal year.
And I reckon a P/E ratio of 15.2 times for 2017 is a decent level at which to hitch onto Hollywood Bowl’s exciting growth strategy.
Breathe easy
Like Hollywood Bowl, medicines creator Vectura (LSE: VEC) is also expected to suffer its share of earnings turbulence in the near term. In this case, a 4% decline is anticipated by City brokers.
But in my opinion, any bottom-line trouble should prove short-lived as the merger between itself and Skyepharma in 2016 creates a leader in the fast-growing respiratory care segment.
Not only are sales of Vectura’s Flutiform and Ultibro treatments steadily catching fire — sales of the former jumped 29% during March-December — but new products like a generic rival to Advair also provide plenty of earnings opportunity. And the huge wads of cash thrown up by Skyepharma’s operations should provide the key to Vectura opening the vast potential of its drugs pipeline.
The Square Mile certainly believes so and predicts that Vectura will rebound from this year’s predicted earnings dip with a 49% bottom-line surge in 2018. While expensive on paper, I reckon a P/E ratio of 21.4 times for the current period is warranted given the firm’s increasingly-rosy revenues outlook.
