Amusement parks cheer
Stocks are on the up and up,
It’s been quite a roller-coaster ride for most investors this year — but amusement park investors are doing more smiling than screaming.
Shares of the big regional theme park operators Six Flags Entertainment (SIX) and Cedar Fair (FUN) are up 5.6% and 4.2%, respectively, this year — and that doesn’t include their thrilling 4% and 5.6% annual dividend yields. Compare that to the 0.1% rise in the Standard & Poor’s 500 index this year and its roughly 2% dividend. It’s not just the regional operators benefiting from strong theme park attendance. Walt Disney (DIS) may have missed firstquarter earnings expectations, but that wasn’t because of the company’s parks. Operating income at Disney’s U.S. theme parks was up 20% from the same period last year and spending per person rose 8%.
Analysts remain bullish on the amusement business heading into the busy summer season as park operators aggressively build attractions and inject tech like virtual reality (VR) into their parks this year. Disney is about to open a park in China, and Six Flags and Cedar Fair are equipping rides with white-knuckle virtual-reality thrills.
“Look at the rides and attractions. It’s as impressive a lineup as I’ve ever seen,” says James Hardiman, analyst at Wedbush Securities. “This type of entertainment — experiences with family — is gaining in popularity. The rides and attractions are resonating.”
Six Flags is perhaps the best example of how the amusement park business is giving investors the ride of their lives. The company, which operates 16 theme parks in the U.S., has seen its shares soar 22% the past 12 months as it has beaten profit expectations the past four quarters. The company’s revenue jumped 36% in the first quarter to $115 million, and analysts think it will be 8% higher for the year at $1.4 billion, says S&P Global Market Intelligence. Six Flags is adding attractions using VR technology from Facebook’s (FB) Oculus Rift and Samsung at nine parks this season, says Barton Crockett, analyst at FBR & Co. New tech should boost cash flow by 6% and attendance by 2%, Crockett says. “VR is extending the life of old coasters and injecting greater freshness,” he says.
Talk about a bottom-to-top ride. Six Flags’ free cash flow hit $350 million the past 12 months, a dramatic reversal from 2010 when the company burned $30 million in cash. The company had filed for bankruptcy protection in 2009.
The ability to refresh rides using technology, rather than just spending $15 million to $20 million to construct entirely new roller coasters, highlights the profit power of these businesses, says Timothy Conder, analyst at Wells Fargo. Regional theme park operator stocks have also become even more attractive as investors appreciate the fat dividends they pay and the relative stability of the businesses. Regional theme parks’ revenue can hold up during an economic downturn because more consumers skip pricey vacations and take local trips. But if the economy is strong, consumers will go to the theme park and also take the exotic vacation.
That’s not to say the industry doesn’t have its challenges.
SeaWorld (SEAS) shares are down 17% the past 12 months as the company bowed to a public backlash against its orca exhibits. Analysts still rate the stock a “hold” as the company phases out its once-marquee killer whale shows. Going forward, the company is using two strategies to win back consumers, Conder says. SeaWorld will emphasize its animal research and conservation efforts in its exhibits. It also plans to broaden its appeal by adding thrill rides.
Another wild card is whether the expansion will cause the market to be oversaturated with entertainment. Comcast’s NBC Universal just opened a theme park expansion based on Harry Potter in Los Angeles. The industry is hoping the new attraction will boost interest in theme parks in the area, rather than soak up demand, Hardiman says.