The Zacks Leisure and Recreation Services industry comprises a wide range of recreation providers such as cruise, entertainment and media owners, theme park makers, resort operators and event organizers. Some of the industry participants also have ski and sports businesses.
Consumer demand for such services is relatively elastic, which means that the industry primarily thrives on overall economic conditions.
Let us look at the three major industry themes:
- The coronavirus pandemic has rattled the world economy, the U.S. economy being no exception. Notably, the country’s unemployment is at an all-time high. Per the U.S. Bureau of Labor Statistics, unemployment rate increased to 14.7% in April. Moreover, despite easing of coronavirus-induced lockdowns, the United States continues to witness rising weekly jobless claims. This has led to sinking consumer confidence and dwindling household income that severely impacted spending activities and consequently, the leisure industry. Furthermore, the rising macroeconomic uncertainties and bare minimum revenue prospects compelled companies to withdraw their guidance.
- The cruise industry has been driven 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. Although cruise companies commenced 2020 on a strong note, demand started declining in mid-February. The companies were compelled to cancel sailings due to the pandemic. In fact, Royal Caribbean stated that bookings remain suppressed but is now better than the mid-April level. It also announced that bookings for 2021 are within the historical range.
- After three months of shutdown, the theme parks are gradually opening doors for visitors. Legoland, the first big Florida theme park, reopened on Jun 1. Moreover, Six Flags Entertainment Corporation (SIX - Free Report) released a set of safety protocols to reopen all of its U.S. parks. Furthermore, 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 have resort facilities and earn through both the categories. The complex business structure results in incurring huge costs.
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 revision, 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 191.4%.
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 45.8% over the past year compared with the broader sector’s decline of 3.5%. Meanwhile, the S&P 500 has rallied 11.1% 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 6.49X versus the S&P 500’s 11.27X and the sector’s 9.93X.
Over the past five years, the industry has traded as high as 11.38X and as low as 4.74X, with the median being at 8.88X, as the charts show.
EV/EBITDA Ratio (TTM) Compared With S&P
The near-term outlook for the industry looks drab due to the coronavirus pandemic. In fact, the industry participants’ earnings and revenues are likely to witness a sharp decline in the coming quarter. Moreover, despite easing of coronavirus-induced lockdowns, the companies may not return to pre-pandemic levels in the near term.
Below are two stocks with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Camping World Holdings, Inc. (CWH - Free Report) , through its subsidiaries, operates as an outdoor and camping retailer. The earnings estimates for its current year have been revised upward by 487.5% over the past month to 31 cents. The figure indicates an improvement of 193.9% from the prior-year reported figure.
Price and Consensus: CWH
Madison Square Garden Sports Corp. (MSGS - Free Report) , which operates as a professional sports company, has a Zacks Rank #2. The earnings estimates for the next year have been revised upward by 353.6% over the past two months to 71 cents. The figure indicates an improvement of 112% from the prior-year reported figure.
Price and Consensus: MSGS