With a long weekend of leisure pursuits behind us, venues will be busy counting their takings. A lot of customers are willing to shell out heavily on enjoying themselves, whether that means going to the cinema, or having a game of ten-pin bowling. That could be good for Hollywood Bowl (LSE: BOWL) shares.
The firm reported this morning that it had hit record revenues for the first half of its financial year. With a simple business model and proven success, ought I to tuck the stock into my portfolio for the long term?
Solid business performance
The trading statement was positive. Six-month revenue of £111m was 11% higher than in the same period the prior year. The company also holds net cash of £44m. Its expanding portfolio of sites in Canada is adding another string to the bow of a business that has previously been focused on Britain.
Revenues are well above pre-pandemic levels and Hollywood Bowl has been consistently profitable. It even turned a small profit in 2020 and 2021, despite significant operating restrictions. Last year’s post-tax profit came in at £37m. That puts the leisure operator on a price-to-earnings ratio of 11, which I regard as cheap.
This may not be an exciting business but I see continued growth opportunities. Demand for bowling remains robust and the company can benefit from economies of scale. Sales of food and drink at its venues mean this is a lucrative business model. Net profit margins last year were 19%. I think there is a lot of room to grow in the UK and Ireland as well as further afield.
Is it a bargain?
As the pandemic showed though, demand for social activities like bowling can fall suddenly, due to unforeseen circumstances.
I also see a risk that a tightening economy could also lead to people cutting back on social activities like a night at the bowling alley. Indeed, although the company said today it is confident about the outlook for its business this year, it did say that it “remains mindful of the ongoing economic backdrop”.
In the past year, Hollywood Bowl shares have moved down 8%. However, they are up 20% in five years, although not exactly in the realms of a stellar performance.
With a dividend yield of 4.8% (5.8% including special dividends), I see the business as attractive from an income perspective. The dividend was well-covered by earnings last year.
Overall, although there are some risks, I see Hollywood Bowl as a somewhat unexciting but decent company with solid long-term business prospects.
Wait and see
Somehow though, the company just does not grab me as an outstanding long-term buy-and-hold opportunity for my portfolio.
The main reason is that I do not think it has a strong enough competitive advantage. It does have an extensive estate already, but a competitor could set up a network of bowling alleys in a few years if they had the funding. I am also concerned about how deeply a recession could eat into demand.
International expansion could see the shares take off — but also adds new risks. I like the Hollywood Bowl business and think the valuation looks quite attractive. However, I do not see it as an exciting bargain for my portfolio. I will not be buying.
