RAVE Restaurant Group Inc (NASDAQ:RAVE), a USD$17.16M small-cap, operates in the consumer discretionary industry, whose sales are driven primarily by consumer sentiment, which is closely linked to employment and wages. Access to capital is also important, so interest rates and lending standards influence the rate at which consumers purchase leisure products. The leisure service sector is also undergoing significant structural shifts resulting from technology applications. Leisure companies are able to engage with its customers faster and easier through online and mobile channels, which has been a positive driver for the industry. Consumer discretionary analysts are forecasting for the entire industry, a positive double-digit growth of 14 percent in the upcoming year, and an enormous growth of 46 percent over the next couple of years. This rate is larger than the growth rate of the Australian stock market as a whole. Is the leisure industry an attractive sector-play right now? Today, I will analyse the industry outlook, as well as evaluate whether RAVE is lagging or leading its competitors in the industry. See our latest analysis for RAVE
What’s the catalyst for RAVE's sector growth?
Rising competition for consumer attention from new activities such as online streaming and mobile games has forced traditional incumbents to adapt or fall behind. However, the leisure service industry as a whole has been expanding. In the previous year, the industry saw growth in the twenties, beating the Australian market growth of 6 percent. RAVE lags the pack with its negative growth rate of -89 percent over the past year, which indicates the company will be growing at a slower pace than its leisure peers. As the company trails the rest of the industry in terms of growth, RAVE may also be a cheaper stock relative to its peers.
Is RAVE and the sector relatively cheap?
The leisure industry is trading at a PE ratio of 25 times, in-line with the Australian stock market PE of 22 times. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. However, the industry returned a higher 24 percent compared to the market’s 16 percent, potentially illustrative of past tailwinds. Since RAVE’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge RAVE’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? RAVE has been a leisure industry laggard in the past year. If your initial investment thesis is around the growth prospects of RAVE, there are other leisure companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how RAVE fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If RAVE has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its leisure peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at RAVE’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into RAVE Restaurant Group's stock, take a look at the company's latest free analysis report to find out more on its financial health and other fundamentals. Interested in other consumer discretionary stocks instead? Use our free playform to see my list of over 100 other consumer discretionary companies trading on the market.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.