Are Theme Park Stocks a Roller Coaster or a Rocket Ride?

Are Theme Park Stocks a Roller Coaster or a Rocket Ride?

According to market research firm IBISWorld, revenue for the amusement/theme park industry grew at a modest annual rate of 2.1% since 2008, as consumers cut back on travel, which limited attendance growth. The firm predicts that as consumer confidence continues to rebound, the overall demand for entertainment, and for theme parks, will rise.

And as I discussed in an article about the hospitality industry, the outlook for travel-related companies is brightening. This bodes well for theme parks too. Although a portion of their business comes from local guests, a trip to a popular brand name theme park is often included in family vacations.

Providing family entertainment for more than 50 years
Six Flags operates 18 theme parks in the U.S., Mexico, and Canada. The company recently announced record revenue for the third quarter of $505 million, a 4% increase over the third quarter of 2012. Guest spending per capita, admissions revenue per capita, in-park revenue per capita, and attendance all increased by a steady 2%.

In the company's earnings release, CEO Jim Reid-Anderson was excited to say, "We are firing on all cylinders..." Continued success in up-selling guests to purchase season passes and membership plans gave a $76 million boost to deferred revenue (and current cash flow), a 28% increase year over year.

Cost management was excellent for the quarter. Operating expenses as a percentage of revenue dropped by 80 basis points to 26.6%. Adjusted EBITDA rose nearly $11 million over last year's third quarter to $268 million.

Continuing to provide "the best day of summer" for guests
Cedar Fair refers to itself as one of the largest regional amusement-resort operators in the world. It operates 11 amusement parks, four water parks, and five hotels. Cedar Point, the company's flagship park, has been voted "Best Amusement Park in the World" numerous times by the Amusement Today newspaper.

Cedar Fair's third quarter also produced record revenue, $592 million, which represented a 7% increase over the same quarter last year. Average in-park guest spending per capita was up 7% to $45.73. Out-of-park revenue (the company's hospitality operations) rose 8% to $58.7 million. Attendance on a comparable park basis rose more than 200,000 additional guests or 2%.

Although operating costs rose 4% due to higher staffing levels, cost of goods sold was down due to careful expense control. Overall expenses dropped 120 basis points as a percentage of sales. Adjusted EBITDA jumped 9% to a new record high of $318.4 million.

Entertainment with Universal appeal
Comcast is a media giant with revenue of $16.5 billion in the third quarter. It owns Comcast Cable, the largest video, Internet, and phone provider in the US. Comcast also owns NBCUniversal, 30 cable networks, the NBC broadcast network, television stations, Universal Pictures, and theme parks under the brand Universal Parks and Resorts.

Although theme park revenue of $661 million for the third quarter was only 11% of NBCUniversal's $5.85 billion total revenue, theme parks were the star of the company's overall performance. Revenue was up nearly 8% compared to the same quarter last year, and operating cash flow was up 8.6% to $343 million.

Management said this was the highest quarterly operating cash flow in the history of Universal's theme parks. The company reported that the excellent revenue performance was the result of higher per capita spending at its Orlando and Hollywood theme parks, and higher attendance at its Orlando park due to the popularity of the new Transformers attraction.

What we learned
Some investors shy away from theme park companies because they are highly leveraged. But the good news is they are able to grow their revenue in sluggish economic conditions as well as when the economy recovers. When consumers are cautious, they may postpone more expensive vacations in favor of going to their local theme park.

During the good times, parks don't necessarily lose these customers. That is because places like Cedar Fair, with high guest satisfaction, earn repeat business from loyal customers. For theme park operators, a small gain of 2% in attendance is still a noteworthy accomplishment, as long as it is accompanied by higher per capita spending per guest.

In following these stocks, it's important to look at the new attractions they announce. The companies are always under pressure to provide experiences that are more exciting and riveting. This of course, requires major capital investments on an ongoing basis.

Cedar Fair's new attractions include the 2014 introduction of the longest inverted roller coaster in the world, called "Banshee," and its new "Amusement Dark" attraction, which is a combination of a coaster and interactive digital games. Six Flags has no fewer than 14 new rides and attractions planned for 2014.

Comcast/Universal's position in the film production industry provides the opportunity to leverage the brand equity of popular films to create popular attractions, such as Transformers and the expanded Harry Potter attraction that opens in spring 2014. In drawing customers, the company benefits from the magic of the movies as well as the magic of the attractions at its parks.

My favorite of the three is Cedar Fair because of the earnings momentum it has. The company expects to achieve Adjusted EBITDA at the high end of its guidance range, and believes it will be able to achieve its long-term goal of $450 million in Adjusted EBITDA earlier than expected.

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