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Party on with leisure stocks
Many cruise lines, theme parks and hotels are bulging with big-spending boomers. Here are some stocks that should soar with the good times.
By Michael Brush
Nearly everyone complains about working too much these days. Well, it appears folks are playing just as hard.
Last year, consumers spent a record 10.2% of their disposable income -- close to $1 trillion -- on having fun. In December, this spending rose more than 6%, compared to the year before, according to government numbers. Not even high fuel costs kept people from getting out and having fun.
Here's a quick look at some companies profiting from all that spending. - Walt Disney's (DIS, news, msgs) theme-park unit posted a 13% increase in revenue during last year's fourth quarter. Knotts Berry Farm, near Los Angeles, run by Cedar Fair (FUN, news, msgs), saw attendance jump 15% in the fourth quarter.
- Cruise ship operator Carnival (CCL, news, msgs) generated an earnings increase of 20% in the most recent quarter, despite a bad hurricane season and rising fuel costs.
- Revenue at Harrah's Entertainment (HET, news, msgs) casinos open more than a year climbed 12% in the fourth quarter.
Who's behind all that spending? The usual suspects: baby boomers. As the population is aging, there is going to be a lot more spending on recreational activities, says Debbie Johnson, an economist at Oak Associates.
Rising home prices have helped, too, says Larry Haverty, a media analyst at Gabelli Asset Management. Some of that wealth created by inflated home prices is "being recycled into slot machines, cruises and theme parks," he says.
Below I'll tell you how to make good money while other folks are spending theirs to have a good time.
Nice rides
Theme-park operators like Disney have to spend money to keep their parks open whether they're crowded or not. So when folks swarm Mickey, Goofy and the gang, profits can jump quickly. While Disney's theme-park revenue increased 13% in the fourth quarter, profits at the unit (as measured by operating income) jumped 51%.
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Haverty expects Disney theme parks to keep drawing bigger crowds, contributing to double-digit growth in cash flow overall at Disney this year.
But the House of Mouse, of course, is about more than theme parks. Its ABC television unit boasts hits like "Desperate Housewives," "Lost" and "Dancing with the Stars." Analysts look to potential summer blockbusters like "Cars" and "Pirates of the Caribbean: Dead Mans Chest" to boost movie-studio division profits. They have finally gotten their act together in several businesses, says AIM Leisure Fund (FLISX) portfolio manager Mark Greenberg.
Disney's not the only amusement-park operator whose stock is worth a look. Cedar Fair, which runs seven amusement parks and five water parks, saw attendance jump about 14% in the fourth quarter at its namesake Cedar Point in Sandusky, Ohio, and at Knotts Berry Farm. And bookings for 2006 are ahead of where they were this time last year. We definitely have some momentum coming into 2006, says Stacy Frole, director of investor relations at Cedar Fair.
Cedar Fair is structured as a limited partnership, which means it passes earnings on to shareholders, who typically dont have to pay taxes on the distributions right away. The company expects to pay $1.84 a share this year, which works out to a yield of about 6.2%. The company has increased the distribution in each of the last 18 years.
Cruising
Carnival is not only the worlds largest cruise company. In the eyes of many investors, its also the best. Carnival is better at what they do than any other company in the cruise business, says AIM Leisure Funds Greenberg. The company operates under several brands, including Carnival Cruise Lines, Holland America Line, Princess Cruises and Seabourn Cruise Line.
Carnival essentially runs a duopoly in the cruise business with Royal Caribbean Cruises (RCL, news, msgs). One barrier to potential competitors is the sheer amount of time and money that goes into building a new fleet, says Morningstar (MORN, news, msgs) analyst Sanjay Ayer, who gives the company a rating of three stars out of a possible five.
As much as cruise companies advertise, most potential cruise takers have never been on one, according to Cruise Lines International Association, so there's room for growth.
Carnival is taking steps to make it happen by offering activities like rock climbing and ice skating right on board, or just outside balcony cabins, says Goldman Sachs Group (GS, news, msgs) analyst Steven Kent.
Roll the dice
Unlike competitors whose lavish casinos attract high rollers, Harrah's Entertainment targets the average Joe who comes back to the tables frequently. To keep this player hooked, Harrahs offers a Total Rewards program, which identifies the most profitable players (including those who lose a lot or spend a lot on drinks) and entices them to come back with offers like deals on meals and rooms. They are miles ahead of the competition here, says Haverty.
The company bought Caesars Entertainment last June, and Harrah's is exploring how to expand the brand into foreign markets like Spain, Slovenia and the Bahamas. Harrahs also wants to move into Singapore. In the U.S., Harrahs is expanding in Atlantic City, N.J., Iowa, Pennsylvania and Biloxi, Miss. Harrah's is expected to announce plans to redevelop properties in Las Vegas some time this year. Investors who hold the stock brush off fears of overcapacity. This is one of the only markets in the world where demand follows supply, says Charles Norton, co-portfolio manager of the Vice Fund (VICEX). They keep building the next greatest thing in Las Vegas and people keep coming.
A night with Hilton
Hotel chains cut their expansion plans dramatically after the terrorist attacks on 9/11. Then the cost of real estate and building materials shot up so much that hotel chains found it made little economic sense to build. The number of hotel rooms available should grow less than 2% a year over the next five years, estimates Citigroup analyst Michael Rietbrock.
At the same time, people are traveling more. So hotels can jack up rates.
This dynamic is likely to continue. We expect hotel demand to continue to rebound strongly, predicts Rietbrock.
A good way to play this trend is Hilton Hotels (HLT, news, msgs), which offers a range of options from upscale digs like Doubletree and Embassy Suites to the more moderately priced Hampton Inn and Hilton Garden Inns. Hilton blew away estimates last quarter as revenue per available room increased 13.5%. It projects gains of 8% to 10% in 2006. Hilton recently purchased the international hotels run by called Ladbrokes PLC (GB:LAD, news, msgs), previously known as Hilton Group PLC. This gives Hilton a solid footing to expand overseas -- and to profit from boomers and others sneaking abroad for their fun.
At the time of publication, Michael Brush did not own or control shares of companies mentioned in this column.
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