The Zacks Leisure and Recreation Services industry includes a wide range of recreation providers such as cruises, entertainment and media owners, theme park makers, resort operators and event organizers. A couple of companies within the industry also have ski and sports businesses.
Consumer demand for such services is relatively elastic. As such, the industry primarily thrives on overall economic growth.
Let us look at the three major themes in the industry:
- The leisure industry is poised to gain from a healthy labor market, rising wages and growing disposable income. As U.S. consumer confidence is expected to be strong in the months ahead, the demand for leisure and recreation services should remain steady.
- Apart from higher household expenses, increased demand for leisure products and services is also aiding the leisure industry of late. According to a report by Statista, revenues at the sports and outdoor space are expected to witness a compound annual growth rate (CAGR) of 9% from 2018 to 2023. Per the Cruise Lines International Association, the cruise industry is expected to grow throughout 2019 with 30 million cruisers, up 6% from 28.2 million in 2018.
- The industry is highly susceptible to high costs of operations, stemming from multiple business models and investments in advertising. Moreover, since most companies within the leisure and recreation service space heavily rely on debt-financing because of the capital-intensive nature of their businesses, the rising interest rate environment doesn’t bode well for them. Further, increased competition from a broad array of alternative entertainment opportunities has been a significant headwind for the industry.
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 bright near-term prospects.
The Zacks Leisure and Recreation Services industry, which is housed within the Zacks Consumer Discretionary sector, currently carries a Zacks Industry Rank #83, which places it at the top 33% 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.
The trend in collective earnings estimate revisions of the constituent companies indicates a solid earnings outlook for the industry, which in turn has helped it in securing a position within the top 50%. In other words, the sell-side analysts covering the companies in this Zacks industry have been steadily raising their estimates.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags on Shareholder Returns
The Zacks Leisure and Recreation Services industry has underperformed the Zacks S&P 500 composite and its sector over the past year. Stocks in this industry have collectively slumped 25% over the past year compared with the S&P 500’s decline of 12.3% and the broader sector’s fall of 17.9%.
One Year Price Performance
On the basis of trailing 12-month EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio, which is a commonly used multiple for valuing debt-laden leisure service stocks, the industry trades at 6.52X versus the S&P 500’s 9.31X and the sector’s 12.99X.
EV/EBITDA Ratio (TTM) Compared With S&P
Over the past five years, the industry has traded as high as 9.97X, as low as 6.52X and recorded a median of 8.32X, as the charts below show.
EV/EBITDA Ratio (TTM) Compared With Sector
Steady rise in wages, lower unemployment and upbeat consumer confidence have been creating a conducive environment for leisure stocks.
Below are four stocks with positive earnings estimate revisions and a favorable Zacks Rank.
Hudson Ltd. (HUD - Free Report) , a North America based travel retailer, flaunts a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for the current year EPS has increased 13.9% over the past two months to 90 cents. This suggests that earnings per share will grow 104.6% year over year in 2018. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: HUD
A renowned operator of sports teams, Manchester United plc (MANU - Free Report) also sports a Zacks Rank #1. The Zacks Consensus Estimate for the current year EPS has moved up 128.6% over the past two months to 16 cents, reflecting an increase of 14.3% from the prior year.
Price and Consensus: MANU
The leading exhibitor of motion pictures, Cinemark Holdings, Inc. (CNK - Free Report) , carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for the current year EPS has increased 7.3% over the past two months to $2.06.
Price and Consensus: CNK
Cedar Fair, L.P. (FUN - Free Report) and its affiliated companies own and operate five amusement parks: Cedar Point, Knott's Berry Farm, Dorney Park & Wildwater Kingdom, Valleyfair, and Worlds of Fun/Oceans of Fun. The company carries a Zacks Rank #2. The Zacks Consensus Estimate for the current year EPS has increased 20.5% over the past two months to $2.82.
Price and Consensus: FUN
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