The Zacks Leisure and Recreation Services industry has been crippled by uncertainties related to the coronavirus pandemic. Declining wages and higher unemployment are hurting the industry.
Nevertheless, Planet Fitness, Inc. (PLNT - Free Report) , Camping World Holdings, Inc. (CWH - Free Report) and RCI Hospitality Holdings, Inc. (RICK - Free Report) are likely to gain in their respective fields buoyed by consistent strategic partnerships, digital initiatives as well as the reopening of economy after coronavirus-induced shutdowns.
The Zacks Leisure and Recreation Services industry includes a wide range of recreation providers such as cruise, entertainment and media owners, theme park makers, resort operators and event organizers. Some companies within the industry also have ski and sports businesses.
Consumer demand for such services is relatively elastic, implying that the industry primarily thrives on overall economic conditions.
4 Trends Shaping the Future of Leisure & Recreation Services Industry
Cruise Operators Hurt by the Pandemic: The cruise industry has been pushed to a standstill by the coronavirus-induced crisis. Major cruise operators like Royal Caribbean Cruises Ltd. (RCL - Free Report) , Norwegian Cruise Line Holdings Ltd. (NCLH - Free Report) and Carnival Corporation & Plc (CCL - Free Report) have lost more than half of the market cap so far this year. Cruise companies commenced 2020 on a strong note. However, demand started declining in mid-February. Due to the coronavirus pandemic, companies had to cancel sailings. Meanwhile, higher-than-anticipated load factors, timing and investment in revenue-generating activities are adding to their costs. In the coming quarter, costs are likely to increase due to the suspension of operations. Carnival stated that as of May 31, 2020, cumulative advanced bookings for 2021 capacity currently available for sale are within historical ranges at prices that are down in the low-to-mid single-digits range. These include the negative yield stemming from FCCs and onboard credits applied on a comparable basis. However, for 2021, booking volumes for the six weeks ending May 31, 2020, were down significantly from the prior year.
Higher Unemployment Rate Hurts: The coronavirus pandemic has rattled the world economy and the United Statesis no exception. Per the U.S. Bureau of Labor Statistics, unemployment rate came in at 7.9% in September — still a high figure historically — but the first under 8% since pre-pandemic levels reported in March. Moreover, despite easing of coronavirus-induced lockdowns, the United States continues to witness higher weekly jobless claims. Further, rising macroeconomic uncertainties and bare minimum revenue prospects have compelled companies to withdraw their guidance.
Liquidity a Major Factor During Pandemic: Maintaining liquidity has become a herculean task for a number of industry participants in the current scenario. Most of the companies are cutting pay and furloughing employees. The industry participants are also suspending share repurchase programs and dividend payouts to improve liquidity. Moreover, supply chain disruptions due the pandemic are likely to hurt the industry in the near term.
Sharp Increase in Consumer Spending Raise Hope: Consumer spending is a key driver of the U.S. economy, as two-third of the economy relies on it. Confident consumers indicate higher spending capability and stronger household spending, which can boost the economy. A sharp increase in raise brings fresh hope. On Sep 28, the conference board reported that the index of consumer confidence jumped to 101.8 in September from the revised figure of 86.3 last month. September’s figure not only beats the consensus estimate of 89.6 but also marks the biggest one-month jump in 17 years.
Estimate Revision Indicates Dull Near-term Prospects
The Zacks Leisure and Recreation Services industry is grouped within the broader Zacks Consumer Discretionary sector. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since Mar 31, 2020, the industry’s earnings estimates for the current year have moved south by 585.4%.
Despite the drab near-term prospects, we will present a few stocks that investors can hold in their portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Lags Sector and S&P 500
The Zacks Leisure and Recreation Services industry has underperformed the Zacks S&P 500 composite and its sector over the past year. Stocks in the industry have collectively plunged 31.3% in the past year against the broader sector’s growth of 9.2%. Meanwhile, the S&P 500 has rallied 15.4% in the said time frame.
One Year Price Performance
On the basis of the trailing 12-month EV/EBITDA (Enterprise Value/Earnings before Interest Tax Depreciation and Amortization), which is a commonly used multiple for valuing debt-laden leisure service stocks, the industry trades at 15.9X versus the S&P 500’s 14.7X and the sector’s 9.93X.
Over the past five years, the industry has traded as high as 15.9X and as low as 4.46X, with the median being at 8.84X, as the charts show.
EV/EBITDA Ratio (TTM) Compared With S&P
3 Leisure and Recreation Services Stocks to Keep a Close Eye On
Planet Fitness: Headquartered in Hampton, NH, was formed in 1992. It is one of the leading franchisors and operators of fitness centers in the United States. In an effort to expand its presence, Planet Fitness is focusing on strategic partnerships and international expansions. The company collaborated with iFit, a leader in online streaming home workouts, to initiate a series of new workouts with minimal or no equipment. The workouts will be available to everyone exclusively on the Planet Fitness App. Despite the coronavirus crisis, management indicated that several private-equity backed franchise groups have expressed interest in further investments in the Planet Fitness brand. Currently, 13 of Planet Fitness’ 130 franchise groups are majority-owned by private equity, while its franchisee owns approximately 15 stores with the largest owning 169 stores (about 8% of the store base).
Shares of this Zacks Rank #3 (Hold) company have gained 16.5% in the past three months compared with the S&P 500 Index’s increase of 6.4%. However, the company’s earnings for 2020 are likely to decline 84.9% due to coronavirus-related woes. However, the earnings estimate for 2021 indicates growth of 592.9%, which reflects analysts’ optimism regarding the stock’s growth potential.
Price and Consensus: PLNT
Camping World Holdings: Headquartered in Lincolnshire, IL, the company was founded in 1966. Through its subsidiaries, Camping World operates as an outdoor and camping retailer. The company is likely to benefit from launch of a fresh peer-to-peer RV rental marketplace as well as a mobile service marketplace in the spring of 2021. It is also investing heavily in product development. The company recently announced its long-term goal. It expects to generate adjusted EBITDA growth in the mid-single digits over the next five years.
Shares of this Zacks Rank #3 (Hold) company have gained 24.2% in the past three months. In the past 30 days, earnings estimates for 2020 and 2021 have witnessed upward revisions of 4.5% and 22.8% to $2.55 and $2.75, respectively.
Price and Consensus: CWH
RCI Hospitality Holdings: Based in Houston, TX, the company operates through Nightclubs, Bombshells and Other segments. Shares of this Zacks Rank #2 (Buy) company have surged 94.2% in the past three months. The company’s earnings for fiscal 2020 are likely to decline 84.4% owing to the coronavirus-related woes. However, the earnings estimate for fiscal 2021 indicates growth of 504.7% that reflects analysts’ optimism regarding the stock’s growth potential. The company is benefiting from the reopening of bombshells and nightclubs. After reopening, most of the locations are generating strong sales and steadier flow of business compared with pre-pandemic levels.
Price and Consensus: RICK