ClubCorp: Headwinds Hitting

| About: ClubCorp Holdings, (MYCC)

Summary

Even if one likes the name for dividend and EBITDA, this might be a good time to turn cautious.

Macro headwinds, be it changing demographics or customer preferences, are starting to make an impact on the fundamentals.

High net leverage and elevated level of capital spending are raising red flags.

The uncertainty related to ClubCorp's (MYCC) prospects in changing macroeconomic environment may have been covered and maybe even discounted in the stock, which is trading at a significant discount to average multiple enjoyed by U.S. theme parks or regional gaming companies. But the changing business fundamentals, combined with the financial health of the business, suggest more pain ahead. Even if one doesn't subscribe to the worst views presented by the shorts, the history of disappointments, ranging from dropping REIT conversion plans to the recent miss, suggests stepping back might be one of the safest options right now, since concerns related to spending controls, especially those that do not negatively impact the growth prospects of the business, may only grow over the coming months.

Glass maybe not be completely empty

Image source: FrontFour Capital letter to ClubCorp.

Even though the stock price movement over the past one year may not suggest much positive about the company, the company does have a collection of good assets, decent cash flow and a track record of growing top line consistently over the past many years. The current dividend yield of more than 4%, financial benefits from the reinvention projects undertaken and a possibility of outright sale may continue to attract certain investors, even though previous bouts of high hopes were followed by disappointments, e.g. prospects of REIT conversion discussed a few years ago.

The issues getting worse and shock therapy not in sight

The problem is that even with the high quality of assets and decent cash flows, there is not just an absence of any major positive catalysts for the stock, but given the macro headwinds, poor momentum and lack of clarity over the company's ability to generate free cash flow, the pressure on the stock may even increase over the coming months. Indeed, even the thesis that problems are largely due to poor communication and a sale is possible may itself get challenged.

As a play on golf and hospitality industry, the business is facing headwinds emanating from not just the changing demographics, but trends and economy as well. Golf is losing popularity. The industry barely grew around 1.8 percent over the last five years, the age of the average golfer continues to move higher and more golf courses closed than opened every year for last ten years. In the meantime, discretionary spending continues to be under pressure and consumer preference is shifting towards casual short duration leisure activities.

The current business momentum is weak. The revenues, which are barely growing around the low single digit rate, came out softer than expectations during the previous quarter and same­ store revenue and EBITDA growth for the majority Golf and Country Club segment are hovering around low single-digit rate. The softness was blamed on adverse weather conditions and weak regional economies like Houston, where same-store combined revenues declined by 2.8%. All in all, not the signs that instill confidence.

Click to enlarge

Image source: ClubCorp presentation

Going forward, with net leverage of 4.4 and uncertainty over the adequate level of maintenance capital spending, growing concerns related to the free cash flow potential of the business may take a toll on the stock. The capital expenditure continues to be at an elevated level and for now, it seems the bear side argument that the business requires high-level of capital spending on 'reinventions' seems to be winning.

Recently, FrontFour Capital made an impressive case for the company to act aggressively to create value for the shareholder, including REIT conversion and sale, highlighting the valuation difference between the stock and other somewhat similar businesses like Accordia Golf (OTCPK:ACGFY), Six Flags (NYSE:SIX), Vail Resorts (NYSE:MTN) and Boyd Gaming (NYSE:BYD), but worth noting that the company has resisted REIT conversion in the past due to lack of significant tax benefits and limitations in its ability to renovate clubs after the conversion.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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