Should I buy Hollywood Bowl shares to hold for a decade?

With the long weekend of leisurely pursuits behind us, the board will be busy counting the take. Many customers love to have fun, whether that means going to the movies, or playing ten pin bowling. That can be good for Hollywood Bowl (LSE: BOWL) shares.

The company reported this morning that it has achieved record profits for the first half of the financial year. With such a simple and proven successful business model, should I put the stock in my portfolio for the long term?

Solid business performance

The trading statement was positive. Six-month revenue of £111m was 11% higher than in the same period a year earlier. The company also has net cash of £44m. A growing portfolio of sites in Canada adds another string to the bow of a business that has previously focused on Britain.

Revenues are higher than pre-pandemic levels and the Hollywood Bowl is consistently profitable. It even made a small profit in 2020 and 2021, despite significant operating constraints. Profit after tax last year came in at £37m. That puts the leisure carrier at a price-to-earnings ratio of 11, which I think is cheap.

It may not be a fun business but I see the opportunity to grow. Demand for bowling remains strong and the company can benefit from economies of scale. On-site food and beverage sales mean this is a profitable business model. Net profit margin last year was 19%. I think there is a lot of room for growth in England and Ireland as well as further afield.

Is it a bargain?

As the pandemic has shown, demand for social activities like bowling can suddenly drop, due to unforeseen circumstances.

I also see the risk that economic tightening can also lead to people cutting back on social activities like a night at bowling. Indeed, although the company said today that it is confident about its business prospects this year, it said that “keeping in mind the remaining economic background“.

In the past year, Hollywood Bowl shares have fallen 8%. However, they are up 20% in five years, although not exactly in the realm of stellar performance.

With a dividend yield of 4.8% (5.8% including special dividends), I see the business as attractive from an income perspective. Dividends have been well covered by last year’s earnings.

Overall, despite some risks, I see Hollywood Bowl as an underwhelming but decent company with solid long-term business prospects.

Wait and see

However, the company just didn’t strike me as an outstanding long-term buy-and-hold opportunity for my portfolio.

The main reason is that I don’t think it has a strong enough competitive advantage. It already has an extensive estate, but competitors can set up a network of bowling alleys in a few years if they have the funding. I’m also concerned about how deep the recession can eat into demand.

International expansion could see the stock take off – but it also adds new risks. I am a Hollywood Bowl business and think the price seems quite attractive. However, I don’t see it as an attractive offer for my portfolio. I won’t buy it.