Having a pint at the local pub or eating out at your favourite restaurant may not feel like a patriotic activity, but with the ‘night time’ economy representing a full 6% of the UK’s GDP rationalising that extra night out a week as ‘doing your duty for Queen and Country’ isn’t quite as ridiculous as it sounds. With the sector accounting for some £66bn of spending annually, there are also plenty of interesting investment opportunities to be found.
Astronomical growth rates
One of my favourites is Fevertree (LSE: FEVR), which makes up-market mixers like tonic and soda water for cocktails. This a fast-growing market as, just as has happened over the past decade with beer, consumers are increasingly demanding pricier, high-quality mixed drinks.
With snazzy designs and hipster-friendly tales of sourcing only the freshest ginger from Nigeria and lemons from Sicily, Fevertree has been growing at a rapid clip. The company’s latest interim results recorded a 69% year-on-year rise in revenue and 72% rise in EBITDA.
What attracts me to Fevertree, besides astronomical growth rates, is the company’s out-sourced production model that rids the company of the low-margin work of bottling and distributing its drinks. This led to gross margins hitting 54.8% over the past six months. With high margins, high growth and net cash on the balance sheet, it’s easy to see why the market has fallen in love with Fevertree and sent its share price up to an astronomical 51 times forward earnings.
One to watch
It’s hard to talk about hipster-friendly listed businesses without mentioning Time Out Group (LSE: TMO), the parent of the millennial-targeted Time Out Magazine. Time Out makes money through traditional print sales and, most importantly, increasingly relies on digital ad sales in the 100 or so cities it has a presence in. As print revenue declines, to the tune of 2% year-on-year over the past six months, the double-digit growth from digital sales will be the critical factor in the company’s long term health.
There’s good news on that front, as the 33% rise in digital revenue over the past half year was exactly in line with a significant 33% increase in global readership. The company only went public in June, but if it can continue to increase page views at a rapid pace and monetise e-commerce opportunities such as concert ticket sales then Time Out could be one to watch in the coming years.
An expensive business
Perhaps the polar opposite of Fevertree and Time Out is pub chain JW Wetherspoon (LSE: JDW). Wetherspoons is already a giant in the industry with 926 pubs, but that hasn’t protected it from the major changes rocking the sector, such as falling foot traffic, high taxes and Britons increasingly shifting towards drinking at home.
Like other pub chains, Wetherspoons plans to confront these issues is to broaden its appeal with more emphasis on food sales, higher-quality pubs and expanding into offering hotel rooms. The problem is this is an expensive business. Net debt is up to 3.47 times EBITDA and operating margins fell to 6.9% over the past year from 7.4% the year before. Wetherspoons has an enviable array of pubs and is still generating significant cash, but with relatively low growth prospects, high debt, low dividends and a rough industry outlook I’ll be looking elsewhere for my investments.