How many people among us love to go bowling? Quite a few, right? Some may participate in leagues, which some just play for fun. But how many bowlers among us know that there is a publicly-traded bowling alley operator? And it’s a Dividend Champion, no less. Let’s take a quick look at Bowl America (BWL.A).
Quick Background:
From Scottrade:
Bowl America Incorporated is engaged in the entertainment business. The Company’s source of revenue consists of fees charged for the use of bowling lanes and other facilities and from the sale of food and beverages for consumption on the premises. As of September 1, 2014 the Company operated 10 bowling centers in the greater metropolitan area of Washington, D.C., one bowling center in the greater metropolitan area of Baltimore, Maryland, three bowling centers in the greater metropolitan area of Jacksonville, Florida, and four bowling centers in the greater metropolitan area of Richmond, Virginia. These 18 bowling centers contain a total of 726 lanes. The number of persons employed by the Company and its subsidiaries is approximately 500 including approximately 250 full time employees.
The company was founded in 1958, and is headquartered in Alexandria, VA.
BWL.A has no direct publicly-traded competitors; most bowling alleys are privately held by individual families or small companies. Brunswick (BC) can be considered an indirect competitor, as one of their divisions offers bowling products. Expanding the peer group to include most recreational activities begins to include gaming companies like Churchill Downs (CHDN) and theme park operators like SeaWorld Entertainment (SEAS).
For more basic information, check out the company’s website and the 2014 annual report.
Fun fact: An investment of $10,000 in June 2000 would be worth $29,923.54 today, all dividends reinvested. This yields a annual rate of return of 7.7%, which beats the S&P 500’s AROR of 3.4% during this time frame. (Source: FAST Graphs)
Investment Criteria:
Let’s run our standard screening criteria on BWL.A to see how it fares as a dividend growth stock:
- Pays a dividend: Yes
- Has 5+ years of dividend increases: Yes (43 years)
- Has not frozen dividend for over 8 quarters: Yes
- Has a Chowder number of 12 or more: No (6.3)
- Has am EPS payout ratio of less than 70%: No (234.48%)
- Pays a dividend monthly or quarterly: Yes (Quarterly; February, May, August, November)
- Has an S&P Quality Ranking of ‘A-‘ or better: No (B-)
- Has generally increasing earnings over the past 10+ years: No
- Is fairly valued/undervalued according to the Normal P/E ratio (blue line): No
- Is fairly valued/undervalued according to the Intrinsic P/E ratio (orange line): No
Other Bonus Ratings:
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- Optimized scores weight insider trading and price momentum heavier than other criteria
- Value Line: 3 for safety; 3 for timeliness
- Scale is 1-5, 1 being best, 5 being worst
Financial Overview:
The dividend yield is impressive at 4.60%, as the stock pays out $0.17 quarterly, $0.68 annually. Although the company is a Dividend Champion, it increases dividends sporadically, raising it anywhere from one quarter to seven quarters after the last increase. This, if you need to live off the dividends, is tough to plan around.
BWL.A has exactly $2,295,000 in cash and cash equivalents. At the end of fiscal year 2014 (which ends in June), the company paid out $3,406,000 in dividends, assuming a rate of $0.66 per share annually. During the same time, the company had $2,053,510 in operating cash flow, but taking into account operational expenses and dividend payments, total net cash flow was -$2,595,666. This is a really bad sign, as it implies the company is burning cash to stay afloat. The company is debt-free, to their credit, and without the dividend payments, is profitable. But the current dividend payment is unsustainable. Taking on debt may be a short-term solution, but is not really sustainable over the long term. I view the dividend as very insecure and likely to be cut.
BWL.A is very thinly traded. Average daily volume is only 1,425 shares. BWL.A also has a Class B share class, which are convertible to Class A on a 1-to-1 basis. However, these Class B shares are not listed or publicly traded. Class B shares have 10 votes per share, as opposed to the Class A’s one vote per share. With 3,746,454 class A shares outstanding and 1,414,517 class B shares outstanding as of September 2014, and assuming today’s price of $14.78 applies to both classes of shares, the total market cap of the company is only $76.27 million, placing it solidly in micro-cap territory. The company has been a net issuer of shares, going from ~5.141 million shares outstanding in 2011 to 5.161 million today. The company’s shares have not split since 2001.
Currently, the company’s P/E ratio is 51.2. Morningstar pegs the one-year forward P/E ratio at 29.2. Judging by the rather shocking overvaluation, as seen by FAST Graphs, and the current earnings trend, I view this as a bad thing. The share price is much more likely to fall than for earnings to increase substantially. Gross, operating, and net profit margins are all significant worse than the peer group’s (64.46% vs 85.96%, 5.97% vs 29.92%, and 6.56% vs 22.98% respectively). Even keeping in mind the caveat that the peer group does not include any direct competitors to BWL.A, I am not impressed.
Assuming that all companies revert to an average P/E ratio of 15 in the long run, and projecting the current compound annual growth rate forward, we can project how the stock will perform in the future. Earnings for BWL.A are expected to decrease by 3.5% annually. By 2020, we are expected to lose 15.0% annually, making this a stock to run away screaming from. BC, CHDN, and SEAS are all expected to perform much better, with annual rates of return of -7.23%, -1.15%, and 8.92%, respectively.
Risk Factors:
Besides the standard issues of safety, financial solvency, and economic downtowns, the main risk to BWL.A is obsolescence. One of the worst things a customer-facing entertainment company can do is be unattractive and “old”. If it is, it naturally follows that people will choose to go elsewhere to have fun. Even management acknowledges this: “People simply have more choices for recreation and for shrinking budgets.” And it seems that this has already happened. For example, see this gem of a Yelp review:
Seriously… this place looks like it’s 100 years old. Everything is so damn old… but I suppose this is the standard for Bowl America? every other locations that I’ve been to just looks……… old. Not homey-grandmother-comfort-old way, like… grimey-smelly-moist-bathroom thats been abandoned by a hoarder old.
This seems to be a common complaint among Yelp reviews. See the ones for this location (3.5 stars), this one (2.5 stars), here (3 stars), and here (3.5 stars). Interestingly, in the above-linked management letter to shareholders, the company doesn’t address these concerns at all, instead choosing to say that they “continue to feel that bowling has an important role to play in our recreation future.” This may be true, but if customers are becoming increasingly dissatisfied, why isn’t management much more clear on how they will handle it.
Final conclusion:
Wow, I don’t think I have ever been less impressed with a company. The dividend is high and raised sporadically, but unsustainable long-term; I expect an eventual cut. Margins are terrible, and the company burns cash as-is. And the company’s customers are being dissatisfied with “old”, out-of-style alleys and arcades, and management isn’t addressing this to my satisfaction. To top it all off, the company is extremely overvalued. Avoid this stock.
What do you think? Does BWL.A make the cut for your portfolio? Also, how can I improve future analyses?
Disclosure: None
All data is accurate as of market close, 03/31/2015. My stock analysis archive page has been updated accordingly. Please read my disclaimer here before choosing to invest. Company logo image source is available here. Data source is FAST Graphs, David Fish’s US Dividend Champions List, or company materials, unless otherwise indicated.
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