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It's not fair to call investing in amusement parks a roller-coaster ride. At least coasters have their ups to offset the downs.
No, buying into the publicly traded park operators these days is more like a freefall tower drop. The thrills are happening in just one direction.
Just look at how the two regional amusement-park chains, and the operator of family-friendly resorts with huge indoor waterparks fared in yesterday's trading.
Cedar Fair (NYSE: FUN )
Six Flags (NYSE: SIX )
Great Wolf (Nasdaq: WOLF )
All three companies have reported earnings over the past week. As consumer-facing businesses, they're getting whacked hard, even after showing respectable resiliency during these soft economic times.
Let's start with Six Flags. Tuesday's dip came after a sharp 36% sell-off on Monday, when the company posted its telltale third-quarter results. Regional parks make most of their money during the summer, so this is the most important quarter for these seasonal players.
It must have been a brutal run for Six Flags, right? Wrong. Revenue climbed 5% to $489.3 million, despite having fewer operating days during this year's quarter. Attendance rose during the period, but that's not all. A boost in guest spending, and the company's ability to milk sponsorship and licensing revenue, improved the per-capita revenue figure to $40.27 per guest, up from $38.82 a year earlier.
Earnings clocked in at $0.95 per diluted share, well ahead of last year's $0.61-a-share profit. As CEO Mark Shapiro notes, the company is about to wrap up the first year of positive free cash flow in its history, a sharp reversal from last year's $170 million deficit.
So why is the stock tanking? Well, let's just say that there are concerns about how shareholders will make out in the company's transformation.
"We cannot grow at the rate I know we are capable of," Shapiro explained during Monday's conference call, "carrying this amount of debt."
"Enough is enough," he says. "The company is ready to fire once the noose of the balance sheet is cut away. Cutting away that constriction is in the best interest of all of our stakeholders. So we are exploring all of our options, and that's all we will say about that today."
Whether that implies a filing for bankruptcy reorganization, or the more likely route of a massive equity-diluting move to shore up a balance sheet sagging with $2.1 billion in long-term debt, Six Flags will be in good shape. Common shareholders may not be so fortunate.
Last week was a big one for the amusement-park industry, with Cedar Fair, Disney (NYSE: DIS ) , and Anheuser-Busch (NYSE: BUD ) reporting on their summer quarters. Disney and Anheuser-Busch run diversified conglomerates, so investors aren't just buying into the theme parks. However, both companies did post revenue gains in those particular corners of their empires.
Cedar Fair is the pure play. The operator of regional thrill havens like Cedar Point in Ohio and Knott's Berry Farm in California posted a sharp increase in profitability, despite a revenue dip. The company's top line fell 5% to $540.3 million, but that's the result of a missing week compared to last year's third quarter. On an adjusted basis, revenue would have crept 3% higher, as healthier attendance counteracted a slight decline in guest spending.
Cedar Fair units are yielding a chunky 13% payout. With $1.7 billion in debt, one has to wonder whether the company is better off paying down its debt, rather than continuing its generous distributions. Even if it alienates the income investors, Cedar Fair's plump yield hasn't supported its stock price lately.
Six vs. Cedar
Six Flags is approaching Cedar Fair's goal of EBITDA margins in the 35% range. The two companies also bear ballpark resemblances in debt and revenue. However, Cedar Fair has been consistently profitable on an annual basis, while Six Flags is just starting to taste the sweet reward of running a business that generates positive free cash flow.
I am an investor in both companies. Which would I recommend right now? I'd have to say Cedar Fair. Six Flags may offer the greater upside potential, given its super-cheap share price, but let's see what kind of massive dilution -- or worse -- lies in store. The company has some preferred shares coming up for redemption next summer. It can't tap its credit lines for debt refinancing. It will have to make a decision in the next few months, and the stock won't exhale until its fate is sealed one way or the other.
The industry's upside
Cedar Fair and Six Flags seem poised to enjoy robust fourth quarters. They each had healthy Halloween seasons -- pretty much all that's left in the seasonal park operating season for most of their properties.
As a result, even if the economy worsens over the next few months, the sector is already in hibernation until the parks open again next year, in time for the 2009 summer rush. By then, the recessionary worst may be over.
Great Wolf doesn't have that luxury. Its resorts are open year-round, and its insulated waterparks offer watery escapes during the holidays. That appeal may explain why InterContinental's (NYSE: IHG ) Holiday Inn has also been rapidly adding indoor waterparks to some of its more snowbound properties. In that sense, Great Wolf is more in the mold of Chuck E. Cheese parent CEC Entertainment (NYSE: CEC ) , providing year-round indoor entertainment for the staycation set.
So even though Great Wolf posted its 10th consecutive quarter of gains in revenue per available room, a sharp drop in October doesn't bode well for keeping that streak alive. My money is on the seasonal players, who will sit out the next few difficult months. For now, at least, locked turnstiles are a good thing.
Other circumstantial evidence: