Investors seek out growth. After all, wouldn’t you always want to invest in a company that is growing, rather than one that is shrinking? The question is: how much are you willing to pay for growth?
There have recently been a flurry of IPOs, many of which have been very good investments. The Merlin Entertainments (LSE: MERL) IPO was another offering that has generated a lot of interest. So, is it a buy? Let’s dig a little deeper.
A global entertainment company
The main reason people would buy into Merlin is its growth prospects. Merlin runs theme parks and visitor attractions around the world. These include Alton Towers, Thorpe Park, LEGOLAND, Madame Tussauds and Sea Life Centres. Globally, in this field it is second only to Disney.
It is steadily growing its portfolio of visitor attractions, taking its most well-known and successful brands to markets around the world, across Europe, the States and Asia.
These days visitor attractions are as globalised as McDonalds and Coca-Cola, and you will find a Madame Tussauds in many major cities around the world. If I tell you that Merlin is opening Madame Tussauds in Shanghai, Prague and Jakarta next year, and will also soon be opening LEGOLANDs in Japan and South Korea, this gives you some idea of the global reach of the company.
A rapidly growing business
But, you might argue, haven’t most of the fruit already been picked from the trees — surely there is not much room for further expansion? Well, actually I think there is a lot more room for expansion. Merlin currently has about 100 attractions in 21 countries. It aims to open 100 more. Its profits are growing at a compound annual growth rate of 12%, and I expect it maintain this growth rate well into the future.
However, the company is not cheap – it is currently on a 2013 P/E ratio of 22, falling to 19 the following year. Plus it has a substantial amount of debt. So I return to my original question: how much are you willing to pay for growth?
Well, I see Merlin as a company with premium brands, which it has developed in Europe and the States and is now expanding out to the rest of the world. So I see this company as the Burberry of the entertainment world. And Burberry is on a P/E ratio of 19…
Seen in this light, I think Merlin is fairly valued. This is not a stand-out buy, but Merlin Entertainments is certainly worth adding to your watch list, ready to buy on any dips.
The market for theme parks and visitor attractions is booming globally, and if you want a piece of the action, Merlin may well be worth adding to your portfolio.
