UK Leisure Sector Review
23 April 2008
It’s about the leverage…
􀁘 There is a good correlation between share price falls and financial leverage within
our stock universe, but we believe the market should not ignore operational
leverage. Combined leverage (operational leverage times financial leverage)
captures both, and is a better guide to identifying defensive stocks.
􀁘 High margins and access to cash are important, too. High margins cushion earnings
when the going gets tough, and cash is always ‘king’ when credit is tight. These
attributes identify the stocks most likely to emerge leaner and fitter.
􀁘 The leisure sector is cyclical, but the licensed retail and gambling segments are
relatively attractive because they are built on habitual, low ticket activity based on a
mood-enhancing experience (alcohol and gambling).
Defensive stocks: Top pick: Enterprise Inns (BUY, TP: 450p)
Enterprise Inns screens the lowest for combined leverage due to its very low
operational leverage capability. Add to this the largest margins, a reasonably stable
industry and possible conversion to a REIT and the case is compelling. If investors only
want one stock from our stocks universe, this is the one to buy. Punch Taverns (BUY,
TP 675p) is similar but does not screen so well, as it has higher financial leverage from
more debt and higher operational gearing from its managed estate. In the mid-caps,
our top pick is Marston’s (BUY, TP: 320p) as it has the highest dividend yield, followed
by Paddy Power (BUY, TP: