MENU

Should You Avoid Alton Towers Owner Merlin Entertainments PLC?

The recent roller-coaster accident at Alton Towers was truly horrific and has led to a number of severe injuries. Clearly, the health of those involved is more important than investing and, while Alton Towers has now reopened, it seems as though investor sentiment in its owner is still on the decline. In fact, shares in Merlin Entertainments (LSE: MERL) are down slightly today, and have fallen by 4% in the last week alone.

Consumer Confidence

After such an event, confidence among customers is bound to be tested and, as such, it is perhaps to be expected that the number of ticket sales at Alton Towers will be down in the days and weeks ahead. This, though, is unlikely to be an issue faced solely by Alton Towers, with it having the potential to affect ticket sales at theme parks containing fast-paced rides across the UK. As such, it is likely to be a sector-wide challenge rather than one faced solely by Merlin.

Diversification

Of course, Merlin is a very well-diversified business. Certainly, theme parks such as Alton Towers, Thorpe Park and Chessington (all of which offer fast-paced rides) are a major part of its business, but it also has other attractions such as Madame Tussauds and Legoland — the latter of which has been a very popular and profitable performer for Merlin. Therefore, while a short-term decline in ticket sales may hurt part of its business, it is unlikely to make a major difference to its top or bottom lines moving forward.

Growth Prospects

Even if ticket sales do decline this summer versus last summer, Merlin continues to offer a strong long-term growth profile. For example, it is forecast to grow its earnings by 10% this year, and by a further 11% next year. That’s a growth rate of around 50% higher than that of the wider index, and shows that as the UK and European economies start to recover from the credit crunch, cyclical plays such as Merlin could be among the major beneficiaries.

Valuation

The problem, though, is that Merlin’s share price appears to fully factor in its positive growth outlook. For example, Merlin trades on a price to earnings (P/E) ratio of 22.6, which is considerably higher than the FTSE 100’s P/E ratio of around 16. In fact, Merlin’s rating is more akin to a global defensive consumer play which has a long track record of growth, a diversity of brands, and exposure to multiple regions across the globe, including emerging markets.

Merlin, although an appealing business, remains much more dependent on the performance of the European and UK economy, and so it is difficult to justify such a high valuation – especially when it equates to a price to earnings growth (PEG) ratio of 2.2.

Looking Ahead

While Merlin may remain in the headlines in the short run and its short term sales versus last year may be somewhat downbeat, its long-term prospects remain relatively bright. That is evidenced by its strong growth rate, although even this does not appear to be impressive enough to warrant the current rating on the stock. As such, Merlin does not appear to be worth investing in at the present time, although that is on valuation grounds rather than being due to recent news flow.

Of course, finding stocks that are worth adding to your portfolio is never an easy task. That's why The Motley Fool has written a free and without obligation guide called 7 Simple Steps For Seeking Serious Wealth.

It's a step-by-step guide that could make a real difference to your portfolio returns in 2015 by helping you to find the best stocks at the lowest prices.

Click here to get your copy - it's completely free and comes without any obligation.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.