3x FTSE 250 Travel & Leisure Stocks I would avoid

FTSE 250 Travel & Leisure

The UK Travel & Leisure sector has performed poorly over the last 12 months, with the NMX5750 sector falling from 10400 in July 18 to 9200 at time of writing.

Now with the companies I’m about to talk about, you could well make money from them over the next year. I’m not predicting a slide of any kind. I’m really not one for predictions at all. I prefer, and tend to act upon facts instead.

However, my search for companies I want to own or spreadbet is based on finding the cream of the crop. The best of the best. My rules and filters for finding a company are difficult to pass. Truth be told, not many companies make it through.

Today I want to talk to you about 3x FTSE 250 Travel & Leisure companies who have not made the grade for me. Half decent businesses in their own right, but certainly not ones i’d be selecting for my own portfolio or my members only watchlist.

The first is [CINE] Cineworld plc. These guys are only taking a 26% gross margin slice off their revenue each year. There’s also the concerning depreciation costs which make up between 25-30% of their operating profits. As a result, they are left with little.

The company have historically seen around a 7% net earnings per year, which is lower than I like in a watchlist company. However, recent years have seen that rise to 13% which is more like it. However, gross margin is still too low for me and the depreciation costs are rising every year at an alarming rate. From 18% in 2008 to 29% of the operating profit in 2017.

Some investors and traders may well make good money out of [CINE] over the next few years, but they did not pass the test for me and are certainly not the best place to put my money.

[GVC] GVC Holdings plc are also one that I have decided to pass on. These guys own brands such as Partypoker, Foxy Bingo and bwin amongst others. For me the concern here lies in their erratic expenses. One year posting 65% expenses from their operating costs, the next year 90.3% expense costs. We also have seen huge depreciation costs swoop in since 2016. In 2015 these were at an acceptable level of 3.7% of operating costs. In 2016 & 2017 this jumped to 34%.

Over the last 10 years, [GVC] GVC Holdings plc have posted inconsistent results ranging from -1,4% net earnings years such as in 2011, and great years like 2018 when they posted 22.4% net earnings.

My concerns here are mostly around the inconsistency. There are more consistent companies where we can be putting our money. And share prices are renowned for disliking erratic earnings.

Finally, I’d like to take a quick look at [MERL] Merlin Entertainments plc.

The theme park and attraction operator which owns Alton Towers and Madame Tussaud’s amongst others has a very high 82% gross margin, acceptable expenses and depreciation costs and since 2013 have been posting some promising numbers with net earnings as high as 13.6% in 2018.

My concern lies in a few other areas.

Currently [MERL] Merlin Entertainments plc have a higher value of short term liabilities against short term assets. This is the wrong way around for me. I want to see a company with more assets than liabilities. Long term debt is slightly too high for me, although it has been coming down since 2011. Yet the debt still stands at £1 billion. For a company making £230 million a year it means it’ll be a while before they can pay that off, assuming they don’t need to borrow more in the coming 4-5 years.

Capital expenditure is also high. These guys are buying property, plant and equipment at 135% of their earnings. Meaning they are spending more than they probably should.

Finally the return on shareholder equity is too low for me at 13%. With £1.7 billion in assets (mostly long term assets in the form of Property, plant and equipment) they have not shown that they can use these assets to make big income with only £230 million net earnings coming through.

Not an awful company by any stretch of the imagination. But again, they just don’t have strong enough results for me.

I have found and added a number of companies into my watchlist that far surpass the results from these 3 companies and by picking the best of the best I am putting myself and my members in the best possible position to succeed by focusing my investments only on those great companies.

Companies like [CINE], [GCV] and [MERL] are in my opinion, probably not the best places to put your money to work for you.

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About Chris Chillingworth

Self confessed lover of racing, american football and whiskey. Trader and Investor since 2011. Chris has now coached over +1500 traders using his mechanical systematic trading strategies and now also runs a members only watchlist of FTSE stocks.

View all posts by Chris Chillingworth

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