Rising Gas Price Dampens Prospects of Leisure Stocks - Analyst Blog

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The crisis in Iraq has had a direct impact on global crude prices. The consequent rise in gasoline price is expected to hurt diverse businesses that are directly or indirectly dependent on gasoline. The leisure industry, consisting of restaurants, tourism and stores, is expected to be among the indirect victims of this gasoline price increase.

Currently, the national average price of $3.67 per gallon, which is the highest since 2008, the year gasoline hit its all-time high. The average price has risen significantly since Memorial Day and is expected to increase further. Due to the Iraq turmoil, people have to shell out more owing to the hike in prices. As a matter of fact, even before the Iraq turmoil, rising demand for fuel in the U.S. and extensive maintenance of some Gulf Coast refineries reduced gasoline output, thereby keeping the prices above average.

The leisure industry, which includes amusement and water parks, movies, theaters, casinos and hotels, is expected to do less business this time due to less affordability of Americans. The leisure industry is also largely dependent on the airline industry, which is likely to bear the brunt of the increase in gas prices.

Airlines have been steadily increasing fuel surcharges for transatlantic flights and raising domestic airfares to cover costs. With a further increase in gas prices, they would try to pass on the cost to customers, thereby forcing business and leisure travelers to reconsider their travel plans. People who prefer to drive would hit the road less often to limit their spending on fuel. Though it is difficult to pinpoint leisure stocks that would be hurt by the increase, we have identified three stocks, which are likely to feel the heat.

Cedar Fair, L.P. ( FUN ) owns and operates amusement and water parks in the United States and Canada.  Rides at these amusement parks use gasoline to operate. The rise in gas prices may translate into increased costs for admission. This Zacks Rank #4 (Sell) company posted a loss of $1.51 last month, which compared unfavorably with the Zacks Consensus Estimate of a loss of $1.12 and the year-ago loss of 84 cents. Though revenues beat the consensus mark, it declined 3.0% year over year to $40.0 million. Estimates for the company have largely moved downwards for 2014 and 2015 over the last 60 days.

Revenues for SeaWorld Entertainment, Inc. ( SEAS ), a theme park and entertainment company, may also be pressurized by the same factors. This Zacks Rank #3 (Hold) company posted weak first quarter results last month with a loss of 56 cents, wider than the Zacks Consensus Estimate of a loss of 47 cents and the year-ago loss of 49 cents. Revenues also missed the consensus mark and declined year over year.

Thor Industries Inc. ( THO ), which manufactures and sells a range of recreational vehicles, and related parts and accessories, is also likely to be affected by the surge in prices. Expensive gasoline makes the use of motor boats, recreation vehicles, and anything else that has a large engine, costly. This Zacks Rank #3 (Hold) company's third quarter fiscal 2014 earnings of $1.03 missed the Zacks Consensus Estimate while revenues remained in line. Estimates for the company have largely moved downward for the upcoming quarter, fiscal 2014 and fiscal 2015.

Other Victims

Apart from the core leisure companies, airline stocks like Southwest Airlines Co. ( LUV ) and United Continental Holdings, Inc. ( UAL ) would likely be among the sufferers. Higher airfares would compel travelers to either postpone their tours or use other means of transport. The hotel industry also falls in the line of fire with the RevPar of leading hoteliers like Starwood Hotels & Resorts Worldwide Inc. ( HOT ) and Marriott International, Inc. ( MAR ) likely to be adversely affected.

Also, companies like Speedway Motorsports Inc. ( TRK ) and Dover Motorsports Inc. ( DVD ) that promote motor sports entertainment would be impacted by the rise. Also, Winnebago Industries, Inc. ( WGO ) that manufactures and sells recreation vehicles primarily for use in leisure travel and outdoor recreation activities is expected to witness declining profits.

With individuals having to spend considerably more on fuel, visits to casinos, resorts, restaurants, movie halls, and theaters would automatically witness a decline, thereby hurting the business prospects of Las Vegas Sands Corp. ( LVS ), Vail Resorts Inc. ( MTN ), owner and operator of resorts in the U.S.; Regal Entertainment Group ( RGC ), operator of multi-screen theatres; and AMC Entertainment Holdings, Inc. ( AMC ), a motion picture exhibitor in the United States.  Also, revenues of Disney World, owned by The Walt Disney Company ( DIS ) - a popular destination for which people save all year would be dampened. People would prefer to stay at home rather than dine out, thereby pulling down the sales of restaurants like McDonald's Corp. ( MCD ) and Yum! Brands, Inc. ( YUM ).

Additionally, higher gas prices would make customers reduce their visits to retailers, thereby slowing down the revenues of stores like Wal-Mart Stores Inc. ( WMT ) and The Kroger Co. ( KR ). They would also be more inclined towards essential purchases rather than spending on toys and games, resulting in lesser revenues for leading toys makers like Hasbro Inc. ( HAS ) and Mattel, Inc. ( MAT ).

Conclusion:

We would like to remind investors that besides the housing crisis, a surge in gasoline prices was one of the leading factors that pushed the economy into recession in 2008. Hike in fuel prices would compel Americans to reconsider their travel plans, which would have an adverse impact on several sectors and hinder the economic momentum gained over the recent quarters.


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THOR INDS INC (THO): Free Stock Analysis Report

CEDAR FAIR (FUN): Free Stock Analysis Report

SEAWORLD ENTERT (SEAS): Free Stock Analysis Report

SOUTHWEST AIR (LUV): Free Stock Analysis Report

WAL-MART STORES (WMT): Free Stock Analysis Report

STARWOOD HOTELS (HOT): Free Stock Analysis Report

YUM! BRANDS INC (YUM): Free Stock Analysis Report

LAS VEGAS SANDS (LVS): Free Stock Analysis Report

KROGER CO (KR): Free Stock Analysis Report

MARRIOTT INTL-A (MAR): Free Stock Analysis Report

HASBRO INC (HAS): Free Stock Analysis Report

MCDONALDS CORP (MCD): Free Stock Analysis Report

MATTEL INC (MAT): Free Stock Analysis Report

DISNEY WALT (DIS): Free Stock Analysis Report

REGAL ENTMNT GP (RGC): Free Stock Analysis Report

UNITED CONT HLD (UAL): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: THO , FUN , SEAS , LUV , WMT

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