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Sometimes the FTSE 250 index can be a good place to hunt for medium-sized companies that have serious long-term growth potential.
Take Hollywood Bowl (LSE: BOWL) as an example. The FTSE 250 leisure operator grew revenue by 9% last year. Net profit moved up even quicker, by 16%,
But I think the company could just be getting started!
Bowling over the competition
It is looking to apply its core expertise beyond 10-pin bowling as well as increase the appeal of existing sites, by building a mini-golf course at some of them.
That is not what I see as the key opportunity, though. Hollywood Bowl continues to expand its proven core bowling offering in the UK, having opened a record new five sites last year. Meanwhile, it opened a couple of new sites across the pond in Canada.
That puts it on course to have 35 sites in the North American country by 2035 and 95 in the UK. That would be growth of 24% in the number of UK sites – and 133% in Canada.
Now, a decade is a long time and things may not go according to plan. The pandemic saw leisure sites shuttered on months on end and that is a risk for any future public health emergency. But, as a long-term investor, the fact that this FTSE 250 is planning a decade ahead appeals to me.
Here’s what excites me
Why am I so excited about growth opportunities in what many see as an old-fashioned part of the leisure sector?
It is simple. Hollywood Bowl has proven that it can deliver economies of scale by rolling out a simple, but popular formula. That let it achieve a net profit margin of around 14% last year.
Canada has a lot of single-site operators. It can buy them up, squeeze out economies of scale, and grow profits.
The firm’s ownership of an equipment business in the country can further help its economics and speed of estate expansion, as well as giving it an advantage over rivals.
If things go well, it should be able to grow revenues strongly over time — and, thanks to those economies of scale, increase profits even quicker.
Generous dividend and reasonable valuation
So, while this may look like a dull business in a stagnant part of the economy, in fact I reckon there is a strong long-term growth story here. At 13 times earnings, I think the share is attractively priced.
Meanwhile, the company is highly cash generative: last year, adjusted operating cash flows were £64m
That supports a dividend yield that, at 5.1%, is well above the FTSE 250’s 5.1% average.
Plus, the dividend is growing strongly! Last year’s 10% growth in the dividend per share was an indication that management is confident about the direction of the business.
There are risks, of course. Successful international expansion can be harder than it looks. It adds exchange rate risks too.
Plus, bowling is not top of mind for most people when they have a spare evening and want to let down their hair. In a weak economy, its relative value may become less attractive compared to cheaper options.
Taking the long-term view, I see Hollywood Bowl as a FTSE 250 share for investors to consider thanks both to its dividend and business growth potential.
