Should you buy Ardent Leisure Group at today’s share price?

Ardent Leisure Group (ASX: AAD) owns and operates leisure and entertainment assets across Australia and the United States. It is the owner of the Dreamworld and WhiteWater World theme parks, which rival Village Roadshow Ltd’s (ASX: VRL) Movie World, Sea World and Wet N Wild Water World theme parks in Queensland. The group also operates a host of AMF and Kingpin bowling centres throughout Australia as well as the Goodlife Health Clubs chain of gymnasiums.

Recently, Ardent’s share price has fluctuated drastically, with the stock down almost 20% from its recent high. I believe the volatility makes for the perfect time to buy this top-quality business. Here is a run-down of why.

The Australian business

Ardent is in the business of providing entertainment; it relies heavily on inbound tourism into Australia, given 65% of its earnings come from Australian operations (with 25% of its earnings coming from its portfolio of theme park assets alone).

In the first quarter of 2016, its  business units all performed strongly with group revenues up 19% to $166 million (versus prior corresponding period). Earnings (EBITDA) came in 9% higher against first quarter of last year at $37.2 million, signalling robust growth across all divisions.

The U.S. business

Ardent operates in the United States under its Main Event brand. Main Event provides whole-of-family entertainment by offering bowling, laser tag, movies, food and adventure courses all under one roof.

With Main Event earnings growing 28% in the last quarter, it remains Ardent’s biggest driver of growth and the single largest asset by earnings. Management has acknowledged Main Event’s potential by committing to open another 15 centres over the next two years to drive organic growth. This exposure should allow Ardent to continue to benefit from increased economic activity in the U.S., driving earnings higher as a result.

The currency hedge

Importantly, Ardent’s U.S. assets allow the group to benefit from further appreciation of the U.S. dollar against the Australian dollar (which is likely if the U.S. Federal Reserve lifts interest rates in December). Since a large part of its earnings are U.S. dollar denominated, Ardent stands to benefit from exchange rate movements.

Additionally, a lower Australian dollar should support inbound tourism into Australia, leading to increased traffic numbers in its Australian operation. As such, Ardent’s natural diversification provides a useful hedge for any Australian portfolio and translation gains should see the share price remain supported in the medium-term.

The dividend yield

Ardent has a proud history of paying semi-annual, unfranked distributions. Using its stapled structure, Ardent’s distributions are partially tax-deferred, meaning recipients are not taxed on the whole amount at the time of receipt.

The trailing yield sits at 5.5% per annum, but with the group expected to declare a distribution of 7 cents per security next month, investors can take advantage of the recent pullback and receive approximately 20.5 cents over the next 13 months. At current prices, the distribution alone equates to a 8.61% return over 13 months.

Foolish takeaway

Increasing consumer confidence in the U.S. should see Ardent benefit from an uptick in discretionary spends. Along with Ardent’s Australian operations performing to plan, the group stands to benefit from favourable macroeconomic tailwinds and presents a solid buying opportunity at today’s prices.

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Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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