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Leisure & Recreation Services Industry Near-Term Outlook Dull

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The Zacks Leisure and Recreation Services industry comprises recreation providers like cruise, entertainment and media owners, theme park makers, resort operators and event organizers. Some of the industry participants also operate ski and sports businesses.

Notably, consumer demand for such services is relatively elastic, which means that the industry primarily thrives on overall economic conditions.

Let us take a look at the three major themes in the industry:

  • Trump administration's policy change on travel to Cuba is a cause of concern. In fact, travel ban to Cuba will have significant impact on cruise operators like Royal Caribbean Cruises Ltd. (RCL - Free Report) , Carnival Corporation & Plc (CCL - Free Report) and Norwegian Cruise Line Holdings Ltd. (NCLH - Free Report) . Moreover, the leisure services industry is weighed down by high cost burden. The industry players generally work through multiple business models. For instance, many event organizers also have resort facilities and earn through both the categories. The complex business structure results in incurring huge costs. Further, investment in extensive advertising is hurting a few companies. Moreover, since most leisure and recreation service companies rely heavily on debt-financing thanks to the capital-intensive nature of their businesses, the rising interest rate environment does not bode well.
     
  • However, the U.S. economy is currently witnessing a Goldilocks scenario and is operating in an optimal state by providing full employment and stability. The state of the economy is neither too dull to cause recession nor too bright to result in inflation. In this scenario, one can expect leisure products providers to gain on increased consumer demand. Per the Bureau of Economic Analysis’ "third" estimate, U.S. gross domestic product increased at an annual rate of 2.1% in third-quarter 2019. The increase can be attributed to higher personal consumption expenditures. The uptrend is likely to continue in the near term as well, benefiting the leisure service space.
     
  • Apart from higher household expenses, increased demand for leisure products and services is also driving the leisure industry. According to a report by Statista, revenues at the U.S. sports and outdoor space are expected to see a CAGR of 3.1% from 2020 to 2024. Per the Cruise Lines International Association, the global cruise industry is likely to grow throughout 2019 with 32 million cruisers, up from an estimated 30 million in 2019.


Zacks Industry Rank Indicates Dismal Prospects

The Zacks Leisure and Recreation Services industry is grouped within the broader Zacks Consumer Discretionary sector. It carries a Zacks Industry Rank #215, which places it in the bottom 16% of 255 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. 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 industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since Dec 31, 2019, the industry’s earnings estimates for the current year have moved south by 0.7%.

Despite the drab near-term prospects, we will present a few stocks that investors can take a look at. But it’s worth taking a look at the industry’s shareholder return 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 this industry have collectively lost 0.3% over the past year against the broader sector’s growth of 17.4%. Meanwhile, the S&P 500 has rallied 24.2% in the said time frame.

                                   One Year Price Performance


 
Valuation

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 8.66X versus the S&P 500’s 12.25X and the sector’s 12.6X.

Over the past five years, the industry has traded as high as 11.38X and as low as 7.06X, with the median being at 8.92X, as the charts show.

                        EV/EBITDA Ratio (TTM) Compared With S&P


 
Bottom Line

Steady rise in wages and lower unemployment have been creating a favorable environment for leisure stocks. However, rise in costs and travel ban to Cuba remains a concern.

Below are two stocks with positive earnings estimate revisions and a favorable Zacks Rank.

Carnival Corporation operates as a leisure travel company. This Zacks Rank #2 (Buy) company has beat estimates in the trailing four quarters by 11.3%, on average. It has an impressive long-term earnings growth rate of 8.7%. Moreover, earnings estimate for fiscal 2020 has also increased by 0.9% to $4.55 in the past 30 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

                                                     Price and Consensus: CCL

WW International, Inc. (WW - Free Report) , which provides weight management services worldwide has a Zacks Rank #2. In the trailing four quarters, the company’s earnings beat estimates by 16.2%, on average. The company has an impressive long-term earnings growth rate of 15%. Earnings estimate for current quarter has increased by a penny over the past seven days.

                                                  Price and Consensus: WW

Investors may hold on to the following stocks for the time being.

Royal Caribbean, a cruise operator, carries a Zacks Rank #3 (Hold). The company has beat estimates in three of the trailing four quarters by 5.5%, on average. The company has an impressive long-term earnings growth rate of 9.8%.
                                                    Price and Consensus: RCL

Manchester United plc (MANU - Free Report) owns and operates a professional sports team in the U.K. The company has beat estimates in three of the trailing four quarters by 108.5%, on average. The company has an impressive long-term earnings growth rate of 21.9%.

                                                      Price and Consensus: MANU

 

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