Leisure and brewing stocks are suffering from a lack of pricing power despite the improving outlook ...
Leisure and brewing stocks are suffering from a lack of pricing power despite the improving outlook for UK GDP
Overcapacity has affected both pricing power and profitability for travel and brewing companies
The brewery sector has also seen significant investment over the past few years in pub retailing, which has led to an imbalance between demand and supply
The FTSE All-Share Leisure, Entertainment and Hotels Index is up by only 2.3% in the period between 2 November 1998 and 2 November 1999
Some income fund managers are also looking to hold convertible stock in the sector rather than ordinary shares as a way to get a higher yield. Michael Felton, associate director at Royal & SunAlliance Investment Management, holds Compass Group convertible stock, which is currently yielding 3.4% compared with a prospective year end yield of 0.9% on Compass Group ordinary shares
Felton says that he favours the concept of outsourcing and says Compass Group, which provides catering facilities for companies, has good earnings growth
Elsewhere in the leisure sector, travel groups have been suffering from underbooking this year, with consumers spending more of their disposable income in areas such as telecoms
Royal & SunAlliance is confident that many of these groups will look to reduce the number of holidays they offer next year which should lead to a better balance between demand and supply
Felton points out that travel companies have precious little margin for error when attempting to achieve the correct balance between demand and supply
Felton, who runs the Royal & SunAlliance Equity Income fund, is underweight in the leisure and brewers sector and says that a lack of pricing power is affecting these companies
He has also recently bought into hotel and betting company Hilton Group, which is on a prospective yield for the year end of 4.1%. Hilton has seen its shares fall by 15.14% in the period between 2 November 1998 and 2 November 1999. Hilton has recently acquired the Stakis hotel group and is expected to see cost benefits from this acquisition
Richard Plackett, head of the UK equity income team at M&G says: "The first point is that the leisure sector has been performing poorly in the past few months and it is more a case of looking at the individual company level for opportunities
"The macro-trend going forward will be more helpful for the sector, with UK GDP forecasts looking pretty good, but it is also a question of how long that environment continues
Prackett favours First Choice Holidays, which he believes could be set to reap rewards from a plan to reduce the number of holidays it offers next year
Shares in the company also suffered from a derating after a recent takeover attempt by AirTours. First Choice Holidays saw its share price grow by 10.9% in the period between 2 November 1998 and 2 November 1999 and is on a dividend yield of 3
In the brewers sector, Prackett also favours Whitbread, which has seen its shares fall by 19.57% in the period between 2 November 1998 and 2 November 1999
The group is on a yield of 4.4%. Prackett is keen on Whitbread's exposure to growth areas such as coffee bars and health and fitness clubs and believes the company represents good long-term value
He adds: "Whitbread and First Choice Holidays are both on a significant yield premium to the market with the yield on the FTSE All-Share Index at 2.5
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