The Leisure and Recreation Products industry, representing companies providing recreational services such as swimming pools, golf courses, boats, outdoor spaces etc., primarily thrives on consumer spending. The industry is expected to gain in the near term, especially on a steady rise in wages, lower unemployment and upbeat consumer confidence. The Trump administration’s business-friendly policies such as tax cuts and repealing of regulations are other tailwinds.
Per the last reported numbers by the Bureau of Economic Analysis, the index measuring the average of real GDP and real GDI increased 2.8% in the first quarter, compared with an increase of 2% in the fourth quarter. This marked the economy’s strongest stretch of growth since the expansion started in mid-2009. Also, per a recent report by Trading Economics from the University of Michigan, consumer spending index in the next two quarters is expected to rise to 122.1 and 122.4, respectively.
Moreover, consumer demand for recreation is robust and is expected to continue as the Federal Reserve expects economic growth of 2.8% for 2018, highlighting an increase of 0.1 percentage point from the estimates issued in March. The Fed also expects the rate of unemployment rate at 3.6% for 2018.
According to a report by Statista, revenues at the sports and outdoor space are expected to see a compound annual growth rate (CAGR) of 9.9% from 2018 to 2022. User penetration, which is currently at 8.7%, is anticipated to touch 10.4% in 2022.
All these indicate that the industry stands to enjoy lucrative gains, going forward.
Industry Exceeds Shareholder Returns
The positive demand outlook for leisure products is evident from the industry’s exponential growth. The Zacks Leisure and Recreation Products Industry, being a 15-stock group within the broader Zacks Consumer Discretionary Sector, has outperformed the S&P 500 and its sector over the past year.
While stocks in this industry have collectively gained 24.5% over the past year, the Zacks S&P 500 Composite and the Zacks Consumer Discretionary Sector have rallied 14.3% and 10.5% respectively.
One Year Price Performance
One might get a good sense of the industry’s relative valuation by looking at its price-to-earnings ratio (P/E), which essentially shows how much an investor is willing to pay for each unit of earnings. Typically, a lower P/E ratio is better, though the interpretation is not so simple for cyclical industries, like this one.
Valuation of the leisure product space looks rational when compared with the market at large, as the forward 12-month P/E ratio for the S&P 500 is 18.3X while the industry is currently trading at 17.8X forward 12-month earnings estimates. However, industry’s valuation looks fairly valued when compared with its own range. The industry’s current forward 12-month P/E ratio is same as its median level scaled over the past year. When compared with the one-year high of 22.8X, there is apparently plenty of upside potential left.
Forward Price To Earnings Ratio Compared With S&P
Comparison with the broader sector also ensures that the group is trading at a decent discount as the consumer discretionary sector is currently trading at 22.4X.
Forward Price To Earnings Ratio Compared With Sector
Outperformance May Continue on Solid Earnings Outlook
We have seen that robust demand for leisure and recreational products and increased consumer spending have positioned the industry on the growth trajectory. Increased health awareness among the general public is expected to drive demand for sport products. However, what really matters to investors is whether this group has the potential to perform better than the broader market in the quarters ahead. While the above valuation and price performance shows that there is a solid value driven path ahead, one should look and see if there are convincing reasons to predict a rebound in the near term.
One could get a good sense of a company’s earnings outlook by comparing the consensus earnings expectation for the current financial year with the last year’s reported number, but an effective measure could be the magnitude and direction of the recent change in earnings estimates.
The Price & Consensus chart for the industry shows the market's evolving bottom-up earnings expectations for the industry and the industry's aggregate stock market performance. The red line in the chart represents the Zacks measure of consensus earnings expectations for 2019, while the light blue line shows the same for 2018.
Price and Consensus: Leisure and Recreation Product Industry
This becomes even clearer by focusing on the aggregate bottom-up EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.
Please note that the $2.67 EPS estimate for the industry for 2018 is not the actual bottom-up dollar EPS estimate for every company in the Zacks Leisure and Recreation Product industry, but rather an illustrative aggregate number created by our proprietary analytics model. The key factor to keep in mind is not the earnings per share of the industry for 2018, but how this number has evolved recently.
Current Fiscal Year EPS Estimate Revision
As you can see here, the EPS estimate for 2018 is up from $2.65 at the end of June 2018 and $2.35 at the end of last September. In other words, the sell-side analysts covering the companies in this Zacks industry have been steadily raising their estimates.
Zacks Industry Rank Indicates Solid Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates outperformance in the near term.
The Zacks Leisure and Recreation Products industry currently carries a Zacks Industry Rank #29, which places it at the top 11% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Our proprietary Heat Map shows that the industry’s rank has continually remained in the top 50% over the past few weeks.
Industry Promises Long-Term Growth
The long-term EPS (3-5 years) growth prospects for the industry look appealing when compared with the broader Zacks S&P 500 composite. The group’s mean estimate of long-term EPS growth rate has been increasing since May 2018 to reach the current level of 15.2%. This compares to 9.8% for the Zacks S&P 500 composite.
Mean Estimate of Long-Term EPS Growth Rate
In fact, the basis of this long-term EPS growth could be a steady top line that the Zacks Leisure and Recreation Product industry has shown since 2016.
Despite increasing anxiety over the negative impact of the imposition of tariffs, U.S. consumers have enough reasons to look for leisure products. Per a recent report by Bloomberg, a survey revealed that 38% of respondents have shown clear signs of apprehension regarding the impact of levies. However, they still expect income gains of 2.4% in July, almost on par with the June gains. Such strong sentiments along with easing gasoline prices should continue to encourage consumer spending throughout 2018. Moreover, since personal income is rising modestly and not showing substantial improvement, households have enough additional funds to spend on soft leisure goods but not enough to invest in big things.
Therefore, investors could take advantage of the attractive valuation and bet on a few leisure product stocks with a strong earnings outlook.
Below are four stocks with positive earnings estimate revisions and a bullish Zacks Rank.
Johnson Outdoors Inc. is a leading global outdoor recreation company and flaunts a Zacks Rank #1 (Strong Buy). Earnings estimates for the current year have increased 2.5% over the past two months to $4.05. This suggests that earnings per share will grow 31.5% year over year in 2018. The company’s shares have returned 71.5% over the past year. You can see see the complete list of today’s Zacks #1 Rank stocks here
Price and Consensus: JOUT
The developer and manufacturer of sports boats, Malibu Boats, Inc. (MBUU - Free Report) , has a Zacks Rank #1. The company’s shares have gained 33.1% in the past year. Earnings estimates for the current year have moved up 1.7% over the past two months to $2.44, suggesting an increase of 56.4% from the prior year.
Price and Consensus: MBUU
The global power sports leader, Polaris Industries Inc. (PII - Free Report) flaunts a Zacks Rank #1 and its shares have returned 30.3% in the past year. Earnings estimates for the current year have increased 6.5% over the past two months to $6.54, suggesting an increase of 34.9% from the prior year.
Price and Consensus: PII
Pool Corporation (POOL - Free Report) , a swimming pool maker, carries a Zacks Rank #2 (Buy) and its shares have gained 52.6% in the past year. Earnings estimates for 2018 have been revised upward by 0.2% over the past 60 days to $5.53, reflecting 38.6% growth from 2017.
Price and Consensus: POOL
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