Strategic Acquisitions And Innovation Set The Stage For Exciting Growth In Hospitality

Key Takeaways

• Strategic acquisitions and new high-foot-traffic locations are expected to boost revenue and EBITDA growth.
  
• Enhanced operational efficiencies and revamped F&B initiatives aim to improve net margins and sustain earnings growth.
  
• Rapid expansion and acquisitions, coupled with high net debt and rising costs, pose execution and financial risks potentially affecting earnings and investment flexibility.

Catalysts

Operates location-based entertainment business under the AMF, Bowlero, and Lucky Strike brand names.

• Bowlero's strategic acquisitions, such as Raging Waves and Boomers, with plans to optimize operations and capitalize on underutilized assets, are expected to enhance future revenue and EBITDA growth.
  
• The expansion of new high-foot-traffic locations and a robust pipeline of new builds, such as Lucky Strike in Beverly Hills, are anticipated to drive significant increases in location-based revenue.
  
• Integrating mobile ordering and server tablets across locations is expected to improve guest satisfaction and labor efficiency, leading to enhanced net margins by increasing food and beverage sales.
  
• The successful introduction of revamped menu tiers and food and beverage initiatives, with an emphasis on experiential dining, is expected to continue boosting F&B sales relative to bowling, further improving net margins.
  
• The company's focus on data-driven operational efficiencies and cost management, including the appointment of a Chief Procurement Officer, is anticipated to enhance operating margins and drive sustainable earnings growth.

Bowlero Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bowlero's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from -7.4% today to 6.3% in 3 years time.
• Analysts expect earnings to reach $91.5 million (and earnings per share of $0.61) by about November 2027, up from $-87.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 38.8x on those 2027 earnings, up from -19.2x today. This future PE is greater than the current PE for the US Hospitality industry at 24.4x.
• Analysts expect the number of shares outstanding to grow by 0.83% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.86%, as per the Simply Wall St company report.

Bowlero Future Earnings Per Share Growth

Risks

• The company's reliance on weather conditions for certain businesses, such as the water parks, presents a risk. Adverse weather can significantly impact revenue and lead to losses during peak seasons. (Revenue impact)
  
• The acquisition of undercapitalized businesses, like Boomers, comes with initial negative EBITDA, indicating potential challenges in turning around these assets which can affect net margins in the short term. (Net margin impact)
  
• Rising food costs, specifically mentioned as a headwind in the quarter, can pressure net margins if cost management strategies do not keep pace with inflation. (Net margin impact)
  
• The company's strategy of rapid expansion and acquisition, while beneficial for growth, also carries execution risks such as integrating new businesses and making them profitable, which could affect overall earnings. (Earnings impact)
  
• The relatively high net debt position of $1.1 billion, with a leverage ratio of 2.6x, implies financial risk if cash flows do not match debt obligations, potentially impacting future investment flexibility and earnings growth. (Earnings impact)

Valuation

• The analysts have a consensus price target of $17.35 for Bowlero based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $29.0, and the most bearish reporting a price target of just $12.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.4 billion, earnings will come to $91.5 million, and it would be trading on a PE ratio of 38.8x, assuming you use a discount rate of 10.9%.
  
• Given the current share price of $11.47, the analyst's price target of $17.35 is 33.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.