2023-11-24 23:20:58 ET
Summary
- Bowlero operates bowling centers in North America and has a strategy of acquiring small independently run bowling businesses.
- The company's acquisitions create significant shareholder value through improved financing and attractive acquisition prices.
- At the current price, further acquisitions don't seem to be sufficiently priced in.
Bowlero ( BOWL ) operates bowling centers under Bowlero, AMF, and Lucky Strike core brands. The company was formed with a long history of mergers – first, AMF and Bowlmor merged in 2013 after the companies competed as separate entities for decades. After the merger, the company acquired Brunswick’s in 2014 and Professional Bowlers Association in 2019, with a name change into Bowlero coming in between in 2018. After the company merged with a SPAC in late 2021, Bowlero’s stock has performed quite well – the price of $10.57 at the time of writing is above the merger price despite rising interest rates and a weaker economy, affecting Bowlero’s earnings and valuation with high leverage in theory.
Strategy of Acquisitions
Bowlero’s strategy still revolves around combining entities, although the current strategy focuses on small independently run bowling businesses. The strategy has good room to be executed – Bowlero runs around 350 centers, and estimates independent centers to add up to an number of 3500 . With the company’s strategy, Bowlero estimates that it has potential for acquisitions of around 100 to 200 centers with the company’s value-adding strategy. In addition, Bowlero has significant organic initiatives of newbuilt centers.
The strategy of acquisitions creates shareholder value through improved financing and attractive acquisition prices. Bowlero aims to acquire land-owning centers for around 4-7x EBITDAR. After the acquisition is done, Bowlero tries improving the offering and costs through optimization technology and good industry knowledge. Finally, Bowlero also executes sale-leasebacks on the acquired centers’ land for around a 12-15x EBITDA multiple – in total, the acquisitions add immense value especially as Bowlero’s operations are low-risk, making the company’s cost of capital low.
Bowlero consistently executes on the strategy. To estimate the investments, I added up the company’s quarterly capital expenditures and cash acquisitions. From the capital expenditures, I subtract 3.5% of achieved revenues in the quarter – Bowlero has communicated that maintenance capex should be around 3% to 4% of revenues. Altogether, the accumulated growth capex and acquisitions from Q3/FY2021 add up to growth investments of $615 million, or an average quarterly amount of $56 million.
Author's Calculation Using Seeking Alpha Data
Financials
Bowlero’s revenues were disturbed significantly by the Covid pandemic – revenues in FY2021 were 41.2% below the FY2019 level:
Author's Calculation Using Seeking Alpha Data
As the acquisition strategy has continued, Bowlero’s revenues have growth significantly even from pre-pandemic levels. In FY2019, Bowlero achieved revenues of $672 million, and current trailing revenues stand at $1056 million. In the two most recent reported quarters, Bowlero’s revenues have decreased due to timing of revenues – underneath, the company’s performance seems to be very stable despite economic worries.
Bowlero’s margins have fluctuated quite largely prior to the pandemic with mostly positive single-digit margins. After the pandemic, though, Bowlero has achieved more stable margins ranging from an EBIT margin of 19.9% in FY2022 to a current trailing margin of 16.5%. The company’s guidance of a 32% to 34% adjusted EBITDA margin for FY2024 seems to correspond to a full-year EBIT margin of around 18% to 19%.
The acquisition strategy that Bowlero executes makes the company’s balance sheet leveraged. Currently, Bowlero holds around $1.3 billion in long-term debt, and $1.2 billion in capital leases. Compared to a fully diluted market capitalization of $1.8 billion, the amount seems extraordinarily high. Still, I believe that debt is a good strategic choice and shouldn’t pose too large of a threat – as Bowlero has demonstrated after the pandemic effect subsided, the company has resistant earnings to cover debt payments.
Strategy Execution Signals Upside
Bowlero’s stock currently trades at a forward P/E of 21.9 at the time of writing – at a surface level, the valuation seems irrationally high. I believe that the valuation is more than constituted, though – to demonstrate the valuation further, I constructed a discounted cash flow model. In the model, I factor in further acquisitions and organic expansion into the growth and cash flows.
For revenues, I estimate a figure of $1175 million in FY2024, corresponding to a growth of 11% in line with Bowlero’s guidance. After the year, I estimate the growth to be maintained at a good level through investments – for example for FY2025, I estimate a growth of 8%. After the year, I estimate the investments to come down slowly, improving cash flow conversion but slowing down the revenue growth into a perpetual rate of 2% without further acquisitions. I don’t see very significant pressures for Bowlero’s EBIT margins going forward. For FY2024, I estimate an EBIT margin of 18.5% that seems to be in line with the guidance. After FY2024, I estimate a stable EBIT margin of 19.0%, more in line with the achieved FY2022 and FY2023 level. The cash flow conversion is quite poor due to investments, but also as I factor capital leases’ interest into the free cash flows instead of financing debt in the DCF model as they’re very operational in nature.
With these estimates, illustrated in the following image, along with a cost of capital of 6.27%, the DCF model estimates Bowlero’s fair value at $15.50, around 47% above the stock price at the time of writing. If the company manages to execute further on the acquisition strategy, investors should see a good return on the stock.
DCF Model (Author's Calculation)
The used weighed average cost of capital is derived from a capital asset pricing model:
CAPM (Author's Calculation)
In the most recent reported quarter, Bowlero had around $25.5 million in interest expenses when excluding finance leases. With the company’s current amount of interest-bearing financing debt, Bowlero’s annualized interest rate comes up to 7.93%. The company holds a significant debt position. I estimate Bowlero’s long-term debt-to-equity ratio to be 40%, as the leveraged balance sheet seems to be a part of Bowlero’s strategy.
For the risk-free rate on the cost of equity side, I use the United States’ 10-year bond yield of 4.37% . The equity risk premium of 5.91% is Professor Aswath Damodaran’s latest estimate for the United States, made in July. Yahoo Finance estimates Bowlero’s beta at a figure of 0.29 ; bowling seems to be surprisingly resistant to economic fluctuations. Finally, I add a small liquidity premium of 0.4%, crafting a cost of equity of 6.48% and a WACC of 6.27% - Bowlero has a very low cost of capital due to a defensive industry and opportunistic leveraging.
Takeaway
Bowlero has a good strategy. The company is actively consolidating bowling centers across the United States, but I believe that Bowlero’s consolidation strategy is more valuable than most companies’ – the sale-and-leasebacks of land and a very low cost of capital create favorable terms for Bowlero’s strategy. As an upside, the stock seems to be priced for a lower utilization of acquisitions in the future – with my financial estimates, the DCF model points towards an upside of 47%. I see a buy rating as very fitting for the stock at the current price.
For further details see:
Bowlero Has The Ball Rolling