by Will Ashworth | January 28, 2013 7:00 am
Leisure stocks are hot.
Norwegian Cruise Line (NASDAQ:NCLH), for one, gained 31% in its trading debut on Jan. 18. Since then, it’s gone on to rack up market returns of over 8% — meaning in less than a week, the offering has netted 44% for investors.
This recent IPO isn’t the only way to get in on leisure, though. The PowerShares Dynamic Leisure and Entertainment ETF (NYSE:PEJ) — a collection of 30 U.S. leisure and entertainment companies — is another option, offering exposure to several quality holdings.
Let’s take a look at three of those holdings that stand out from the rest:
My first pick is Wynn Resorts (NASDAQ:WYNN), as the company’s Macau casino seems to be benefiting from a resurgence in gambling in the former Portuguese colony. While it’s hard to fathom, Macau’s casino business is over four times the revenue on the Las Vegas Strip.
It looked as though the Macau gambling scene was cooling off in the first half of 2012, but revenues in December jumped 20% to $3.5 billion. Heck, total gambling revenue in Macau is expected to hit $44 billion in 2013 — a 16% gain over 2012. The bulk of that growth is expected to come from the mass-market of middle-class Chinese tourists, as they should spend 25% more than last year.
The reason Wynn stands out from the other casino players is its valuation. While you could have gotten a much better deal back in August when the stock was trading as low as $95, Macau was also in the middle of a slowdown at the time. Investors feared the Chinese had stopped gambling, and no stocks were immune from the downdraft.
Now that business is once again on the move, valuations have fattened. On a price-to-sales basis, Wynn is the cheapest of all the Macau casino operators. Plus, with its new $3 billion Cotai casino under development, it will continue to be a player in Macau for years to come.
Next up, we have Marriott Vacations Worldwide (NYSE:VAC), the timeshare and fractional ownership arm of Marriott International (NYSE:MAR). It was spun-off from its former parent in November 2011 … and boy did Marriott undervalue the asset-light business.
VAC is up more than 150% since it got started, including gains of 120% over the last year. That’s a pretty big run when you consider Marriott and the SPDR S&P 500 (NYSE:SPY) each gained 14% in the same period. Of course, the question is whether there’s any gas left for such a run to continue.
Things look promising. Marriott Vacations Worldwide raised its full-year outlook for 2012 when it announced Q3 results in mid-October, now expecting an adjusted EPS between $1.17 and $1.31 compared to its original range of $1.03 to $1.17.
Plus, the company is especially attractive despite the run-up because its cash return — free cash flow plus net interest expense divided into enterprise value — is 10.3%. Anything above 10% is a good indication that the company’s efficiently using its capital to generate free cash flow. If it continues to do so, there’s no reason its stock won’t continue to rise.
My last pick is Scripps Networks Interactive (NYSE:SNI), operators of HGTV, Food Network and Travel Channel. I think a company like CBS (NYSE:CBS) would love to get its hands on Scripps’ wildly successful content. Les Moonves, CBS’ CEO, recently announced plans to turn the company’s U.S. outdoor sign business into a real estate investment trust (REIT) and sell off its outdoor business elsewhere. CBS could have as much as $8 billion from the process to spend on content … and Scripps would make an awfully nice addition to the mantelpiece.
The only issue is that SNI was controlled by The Edward W. Scripps Trust until October. Robert P. Scripps — one of the three trustees, passed away on Oct. 18 — so the assets of the trust will now be distributed to the descendants of E.W. Scripps, the founder of The E.W. Scripps Company (NYSE:SSP) and its 2008 spin-off, Scripps Networks Interactive.
Another concern for SNI has been its Travel Channel, which has a similar number of subscribers to HGTV and Food Network, but is significantly lagging in revenue. For the first nine months of 2012, it brought in $209.3 million — 65% less than its other two. SNI has suffered several analyst downgrades as a result and if it doesn’t watch out, Do-It-Yourself Network could pass it.
The weakness, though, means Travel Channel, along with the rest of its brands, will be sold to the highest bidder in the next 12 to 24 months — and the bids will be substantial. All in all, things still look pretty good for Scripps Networks Interactive … and for leisure stocks all around.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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