Recession and Vacation: The Leisure Industry

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During economic recessions, vacation activities can turn into a luxury good as disposable income is reduced. Hence, the leisure industry has suffered quite a bit during the last few years. Nevertheless, an analysis of three industry leaders, Interval Leisure (NASDAQ: IILG), Carnival (NYSE: CCL), and International Speedway (NASDAQ: ISCA) will let us know whether there are profits coming their way.

Cruising to a better future

The world’s largest cruise operator, Carnival, is based in Miami, Florida. Another base is located in the UK. Cruise operations are conducted in conjunction and divided among three segments: standard, premium, and luxury. Recently, the firm made the news as all brands, except the signature one, are performing as expected.

Today, Carnival continues to wrestle with the Concordia and Triumph incidents and rising fuel prices. At the same time, the firm is experiencing slower bookings in the US and Europe, cutting revenue short. Tomorrow, cost reduction policies will enter and deepen its footprint in new and underexploited markets, guaranteeing mammoth future profits.

Looking at finances, Carnival has done better. At this point, revenue and net income have suffered due to an adverse economic environment. On the other hand, cash flow and debt do not present great changes in the same period. Most importantly, since 2008 operating margin has been reduced to a historic low of 17.5%. Nevertheless, the model remains operable and lower performance is mainly due to exogenous variables.

Trading at 28.7 times its earnings, packing a 30% discount to the industry average, with a yield of 2.77% and dividends of $0.25, and a price in the middle of its 52-week range, the stock is undervalued and tempting. It is recommended to buy because economic recovery will disproportionally benefit Carnival, due to is advantageous market position.

Acquisitions over shareholders

Based out of Miami, Florida, Interval is the second largest family vacationing time and entertainment package provider. The firm is present in 75 countries and operates 2400 resorts, with approximately 2 million subscriptions, and has the largest time-share operation in the world. The latest news indicates the company has increased its presence in the Mexican vacationing market.

In the short term, risks are minimized because Interval’s customer is richer than the industry median, memberships are pre-paid, and erosion is low. For the long run, however, the situation is complicated. New users are hard to come by during economic headwinds, and changing conditions in the credit market may slow performance. Also, new acquisitions are questioned because they limit rewards to shareholders.

Financially, Interval is very strong. Revenue and cash flow have experienced increments during the last years, while net income remained stable. Most importantly, debt has been considerably reduced during the same period. Operating margin, however, has been unstable and today stands at 24% from a previous high of almost 30%.

Carrying a 6% discount to the industry, while trading at 24.6 times its earnings, a 1.89% yield and dividends at $0.10, while the price tag is $0.50 below the 52-week high, the stock is fairly priced. In the end it is recommended to hold because associated risks remain high for a long-term investment. Keep looking for developments in the credit market and debt levels.

Racing to a better future

Based out of Daytona Beach, International owns and manages most NASCAR circuits. Revenue is generated through ticket sales, broadcasting rights, sponsorship fees, souvenir sales, and catering services at race events. Lately, the firm has announced a new project for Daytona speedway worth $400 million.

Today, International continues to wrestle with a slow economy, customer’s reduced disposable income, tight competition from other sports events, and renewal of broadcasting rights. For a profitable future and sustainable business model, management needs to obtain important broadcasting contracts, complete the Daytona project, and hope for a quick economic recovery. Those catalysts will secure revenues and customers for the long-term.

International is turning financially weaker by the day, as explained by this post. Revenue, net income, and cash flow describe a downward trend for the last five years. The good news is debt levels have also decreased during the same period, representing one-third of revenue and almost multiplying cash flow by four. Finally, operating margin has progressively declined during the last decade from 33% to 17%.

Currently trading at 26.7 times its earnings, slightly over the industry average, a yield of 0.64% and dividend of $0.20, and a price tag close to the 52-week high, the stock is fairly priced. It is recommended to hold because future profits have not been secured and risks associated with a long-term investment are high.

Time off

Out of the three stocks, International was hit the hardest by the economic recession. Interval, on the other hand, has weathered headwinds very well. However, new acquisitions have questioned the model’s future prospects. Last, Carnival performed well amid market and non-market difficulties. Also, its operating margin remains above the industry average, and future prospects due to its advantageous market position.

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Vanina Egea has no position in any stocks mentioned. The Motley Fool recommends International Speedway. The Motley Fool owns shares of International Speedway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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