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Bowl America: Prudent Management with No Debt and Minimal Rent

December 09, 2012 | About:
This is one in a series of articles where I will be covering most of the 30 Obscure, Profitable Stocks listed by Geoff Gannon on his blog on Nov. 29, 2012. Many thanks to Geoff Gannon for the wonderful list of interesting stock ideas.

Bowl America (BWL.A) and its subsidiaries operate 10 bowling centers in the greater metropolitan area of Washington, D.C., one bowling center in the greater metropolitan area of Baltimore, Md., one bowling center in Orlando, Fla., three bowling centers in the greater metropolitan area of Jacksonville, Fla., and four bowling centers in the greater metropolitan area of Richmond, Va. These 19 bowling centers contain a total of 756 lanes. Its principal 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, with merchandise sales (including food and beverages) and fees for bowling and related services accounting for 30% and 70% of its operating revenues respectively.

Valuation

Bowl America currently trades at 1.94x P/B, a slight premium of 4% to its five year average P/B of 1.86. In terms of earnings based valuations, it is currently valued at a trailing twelve months P/E of 43.68 and a trailing twelve months EV/EBITDA of 15.9. Bowl America achieved a 4.4% ROE for the past twelve months and a five year average ROE of 6.2%.

Financial and Business Risks

Bowl America is debt free with net cash of $5.7 million representing 9% of its current market capitalization of $63.7 million.

Bowl America's business is highly discretionary in nature, subject to big swings in discretionary spending and consumer tastes. Promotional and open play bowling accounts for more than half of its business. The bowling business is a seasonal one, and most of the business takes place from October through May.

Over the recent years, Bowl America, while still remaining profitable and free cash flow positive, has seen its margins deteroriate, with operating margins dropping by two-thirds and ROEs falling by 50% from the early 2000s.

Weather is a double-edged sword. While hot weather or rainy days prompt people to seek indoor activities like bowling, severe bad weather like heavy snow storms can prevent customers from reaching the centers.

Business Quality and Capital Allocation

Bowl America owns properties in some of the most valued locations in the United States. It owns centers within five of the 10 most affluent counties in the nation in a list by the United States Census Bureau on Sept. 20, 2012.

It is also well-positioned to ride out the poor economy, with a significant net cash position and positive free cash flow generation to meet operating expenses and cash outflows. It also minimizes rental obligations by owning the land and buildings at 17 of its 19 bowling centers and renting the remaining two.

Bowl America is profitable for every single year in the past decade and free cash flow positive for nine out of the past 10 years. It has paid dividends every single year since 1995 and currently sports a dividend yield of 5.3%. Dividends are paid quarterly.

Conclusion

Deteroriating operating performance and the discretionary nature of Bowl America's business are offset by a debt-free cash rich financial position, with minimal rental obligations and a strong dividend yield. However, current valuations are unattractive.

Disclosure

The author does not have a position in any of the stocks mentioned.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap deep-value cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


Rating: 3.5/5 (2 votes)

Comments

axamanca
Axamanca - 1 year ago
I enjoyed reading your article. I have owned shares in Bowl America for at least 15 years.

I have one comment to add re: book value. Bowl America recently sold their Winter Park 30 land bowling alley and land for $2,850,000. As of their last annual report, they had 19 bowling centres, with 2 of the centres being on leased land. If you take off the value of the property that was just sold, and the 2 centres that were on leased land, use the remaining 16 centres and value them on a similar basis to the one that was just sold - the true value of the building and land on the balance sheet far exceeds the depreciated value stated on the balance sheet. Add in the marketable securities, cash, less the liability for league monies - I end up with a "real book value" of about $14 per share.

Your article suggests that the stock trades at 1.9 book value. This is true, but there is considerable hidden value in their holdings according to my calculations. I thought that I would share this thought and encourage others to crunch some numbers and check my assumptions.

Peter

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