Economic uncertainty weighs on some leisure stocks

The trick to a successful summer vacation in 2006 is to gas up the car the night before you're scheduled to leave.

That's because filling the tank the day of departure could send you heading right back home as soon as you look at the receipt. It's that discouraging.

The broad-based leisure industry, specializing in cool things we could live without, hopes this won't be a discouraging year. The positives are relatively high consumer confidence, decent economic strength and hints by Federal Reserve Chairman Ben Bernanke of at least a pause in rate hikes.

Yet wage growth remains slow. What could go wrong often has gone wrong in recent years. In addition, not all companies and their shares will perform equally during this traditional season of fun and games.

"The wild cards of consumer confidence and discretionary spending will have investors worrying for the rest of this year," said Tim Conder, leisure industry analyst at A.G. Edwards & Sons Inc. "Besides higher energy prices, rising interest rates have reset adjustable-rate mortgages, home equity loans and credit cards."

Some economic trends can make consumers feel guilty about pampering themselves with leisure pursuits, while others can land a direct body blow to companies.

"For the cruise-ship lines, fuel as a percentage of revenues has risen significantly," said Tom Graves, an analyst with Standard & Poor's Corp. "Cruise demand is OK, but there is some carryover from the negative publicity that surrounded Hurricane Katrina and the port damage that occurred in places such as Cozumel, Mexico."

Graves sees this lull as a time to buy value-priced shares of Royal Caribbean Cruises Ltd. (RCL), whose Royal Caribbean and Celebrity lines control one-fourth of the worldwide cruise industry. Royal Caribbean, selling at a discount to industry leader Carnival Corp. (CCL), is likely to resume earnings growth in the second half of this year and enjoy smooth sailing throughout 2007, Graves said. Price competition and overexpansion are the greatest risks.

Some companies in the leisure category make products that seem oblivious to the economy.

A powerful 100-year-old brand name and an aura of adventure make Harley-Davidson Inc. (HDI) a Conder and Graves selection. Large motorcycles are bigger-ticket items that consume fuel, but Harley-Davidson is well run, with excellent cash flow and virtually no debt. It is active in stock repurchases and offers price potential. The major risk is that it may have begun to saturate its market.