Consumer discretionary businesses are levered to the highs and lows of economic cycles. Over the past six months, it seems like demand may be facing some headwinds as the industry’s 1.1% return has lagged the S&P 500 by 4.8 percentage points.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. Taking that into account, here are three consumer stocks we’re passing on.
United Parks & Resorts (PRKS)
Market Cap: $1.85 billion
Parent company of SeaWorld and home of the world-famous Shamu, United Parks & Resorts (NYSE: PRKS) is a theme park chain featuring marine life, live entertainment, roller coasters, and waterparks.
Why Do We Avoid PRKS?
- Performance surrounding its visitors has lagged its peers
- Poor free cash flow margin of 11.8% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $33.97 per share, United Parks & Resorts trades at 8.7x forward P/E. To fully understand why you should be careful with PRKS, check out our full research report (it’s free).
Warner Bros. Discovery (WBD)
Market Cap: $69.4 billion
Formed from the merger of WarnerMedia and Discovery, Warner Bros. Discovery (NASDAQ: WBD) is a multinational media and entertainment company, offering television networks, streaming services, and film and television production.
Why Do We Think WBD Will Underperform?
- Products and services have few die-hard fans as sales have declined by 5.1% annually over the last two years
- Free cash flow margin is projected to show no improvement next year
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Warner Bros. Discovery’s stock price of $28.03 implies a valuation ratio of 11.5x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why WBD doesn’t pass our bar.
eXp World (EXPI)
Market Cap: $1.20 billion
Founded in 2009, eXp World (NASDAQ: EXPI) is a real estate company known for its virtual, cloud-based approach to real estate brokerage.
Why Are We Out on EXPI?
- 5.2% annual revenue growth over the last two years was slower than its consumer discretionary peers
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 25% annually while its revenue grew
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
eXp World is trading at $7.61 per share, or 14.1x forward EV-to-EBITDA. If you’re considering EXPI for your portfolio, see our FREE research report to learn more.
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