I'm still bearish on this income stock despite it being 35% cheaper than last year

Updated: 
Stock market bear

Shares in Mecca Bingo owner Rank Group(LSE: RNK) have sunk 35% over the past 12 months following a slowdown in earnings growth and a failed bid with 888 Holdings to buy bookmaker William Hill. Based on this morning's interim results -- and the market's initial reaction to them -- I think there could be more downside to come.

Losing streak?

Although like-for-like group revenue grew by 2% (to £378.6m) over the six months to the end of December, like-for-like revenue from venues owned by the £754m cap Maidenhead-based business was pretty much flat (a rise of just £400,000). Overall group operating profit sank 9% to £36.6m, leading earnings per share to slip 7% to 6.9p.

It wasn't all bad. While its retail division remains considerably larger, Rank's digital revenues rose 11% to £52.4m, underlining the growing trend for people to seek their gaming fix online. Investors should be happy that debt levels are now 37% lower than the previous year and those investing for income will welcome an 11% (2p) hike to the interim dividend. Although reflecting that trading in its retail casino and bingo businesses had been "challenging", Henry Birch, CEO of Rank stated that the group was still confident that it would make "good strategic progress" this year.

With shares down over 6% in early trading however, the market isn't convinced and nor am I. While a price-to-earnings (P/E) ratio of just under 12 suggests that shares in Rank are firmly in value territory, the lack of consistent profit growth over the last few years makes me think there are better opportunities elsewhere. Moreover, the slowdown in revenue from its retail operations is worrying, particularly as activities like bingo are relatively inexpensive. Factor-in rising inflation and employment costs and things start to look rather bleak.

That said, the well-covered, 3.7% yield may be sufficient reason for some to invest, especially as this is forecast to rise even higher in 2018, to 4.2%. Whether this kind of dividend growth can continue is debatable, in my view.

A better proposition?

An alternative for those interested in companies that offer relatively low-cost leisure experiences might be Hollywood Bowl(LSE: BOWL).

Back in December, the company reported on a "transformational year" following its IPO, with total revenue growing just under 24% to £106.6m in the year ending 30 September, with a rise of 6.8% on like-for-like revenues. The business also saw a 6.3% increase in the average spend per game and a 16.3% rise in the volume of games played. What a difference when compared to today's figures from Rank. 

Any downsides? Even though net profits are expected to rise £16m in 2017 (based on forecast earnings per share growth of almost 144%), the company's easily replicated business model means competition will remain fierce. Nevertheless, the recent acquisition of Bowlplex -- a move which allowed the £278m cap to add 10 new sites to its estate -- is a positive step. According to the company, these centres are already delivering returns ahead of expectations.

In sum, while its bi-annual payouts look attractive, I continue to be sceptical over Rank's ability to do anything more than tread water for the foreseeable future.  Shares in Hollywood Bowl, which also come with a decent 3% yield for 2017, won't exactly turbocharge your wealth, but based on growth prospects, they look a far better play.

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Paul Summers has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.