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. A couple of companies within the industry 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 leisure services industry is weighed down by high cost burden. The companies within the space 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 ends up increasing costs. Also, investment in extensive advertising is hurting a few companies. Moreover, since most leisure and recreation service companies rely heavily on debt-financing owing to the capital-intensive nature of their businesses, the rising interest rate environment does not bode well. Further, competition stemming from a broad array of alternative entertainment options has been a potent headwind.
- 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’ "second" estimate, U.S. gross domestic product increased at an annual rate of 2% in the second quarter of 2019. The increase is attributable to higher personal consumption expenditures. The uptrend is likely to continue in the near term as well, aiding the leisure service space.
- Apart from higher household expenses, increased demand for leisure products and services is also aiding the leisure industry. According to a report by Statista, revenues at the U.S. sports and outdoor space are expected to see a compound annual growth rate of 3.6% from 2019 to 2023. Per the Cruise Lines International Association, the global cruise industry is likely to grow throughout 2019 with 30 million cruisers, up 6% from 28.2 million in 2018.
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 #198, which places it in the bottom 22% 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, 2018, the industry’s earnings estimates for the current year have moved 15.2% down.
Despite the drab near-term prospects, we will present a few stocks that one can consider buying. Also, it’s worth taking a look at the industry’s shareholder return and current valuation before that.
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 17.1% over the past year compared with the broader sector’s decline of 1.2%. In contrast, the S&P 500 has risen 2% 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 9.25X versus the S&P 500’s 11.22X and the sector’s 12.21X.
Over the past five years, the industry has traded as high as 9.97X, as low as 6.36X and recorded a median of 7.87X, as the charts show.
EV/EBITDA Ratio (TTM) Compared With S&P
Steady rise in wages and lower unemployment have been creating a favorable environment for leisure stocks.
Below are three stocks with positive earnings estimate revisions and a favorable Zacks Rank.
SeaWorld Entertainment, Inc. (SEAS) is a theme park and entertainment company operating primarily in the United States. The company owns and operates U.S. theme parks, including the popular SeaWorld, Busch Gardens and Sesame Place brands. The company carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for current-year earnings per share (EPS) has risen 8.98% over the past two months to $1.61. Earnings in 2019 are expected to increase 57.6% year over year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: SEAS
OneSpaWorld Holdings Limited (OSW) operates various health and wellness centers on cruise ships and at destination resorts worldwide. Its centers offer various health, fitness, beauty, and wellness services, treatments and products onboard 164 cruise ships and at 67 destination resorts. The Zacks Consensus Estimate for current-year EPS has increased 46.2% over the past two months to 19 cents. The company carries a Zacks Rank #2.
Price and Consensus: OSW
Cedar Fair, L.P. (FUN), which owns and operates amusement and water parks, and hotels in the United States and Canada carries a Zacks Rank #2. The Zacks Consensus Estimate for current-year EPS has increased 3.4% over the past two months to $3.36. The company’s earnings have surpassed the consensus estimate in three out of the trailing four quarters, with the average being 3.8%.
Price and Consensus: FUN
Investors may hold on to the following stock for the time being, which currently carries a Zacks Rank #3 (Hold).
Royal Caribbean Cruises Ltd. (RCL), a cruise operator, carries a Zacks Rank #3. The company’s earnings have topped the consensus estimate in each of the trailing four quarters, with the average being 5.9%. The company has an impressive long-term earnings growth rate of 10.7%.
Price and Consensus: RCL
Carnival Corporation & Plc (CCL) operates as a leisure travel company, carrying a Zacks Rank #3. In all the trailing four quarters, the company’s earnings have topped the consensus estimate, with the average being 5.8%. The company has an impressive long-term earnings growth rate of 9.7%.
Price and Consensus: CCL
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