Are These Stocks a Thrill Ride?

Attendance at theme parks suffered during the recession. Market research firm IBISWorld reported that revenue at U.S. theme parks dropped 9% in 2009. A rebound occurred over the next several years as consumers gained more confident footing. Today, let's look at three companies that are definitely benefiting from consumers' increased spending on entertainment.

Is it risky to raise prices?

SeaWorld Entertainment's (NYSE: SEAS  ) theme is giving visitors the opportunity to learn about and interact with the natural world. The company's signature attraction at its parks is its collection of nearly 70,000 marine and terrestrial animals. Well-known brands include SeaWorld, Busch Gardens and Shamu, the famous "killer" whale. The company operates 11 parks.

For the first half of the year, revenue increased 2% -- and set a record -- compared to the year-ago period. The key indicator, total revenue per capita, rose a robust 8% to nearly $65 per person, although total attendance showed a decline of 6%. This was part of the company's strategy to reduce attendance but increase total revenue per capita by increasing prices -- which were raised 9%.

SG&A expenses were up 11% for the first two quarters. This bears watching in upcoming quarters. The company's operating loss of almost $5 million compared to income of $45 million last year -- a $50 million negative variance -- seems strange given the higher revenue and strong per capita metrics. But looking closely, we see a $50 million hit to the income statement due to the termination of an advisory agreement. With the interest expense of $51.5 million added, the net loss for the first half was $56 million.

But as the company points out in its earnings release, adjusted free cash flow was $56 million, up nearly 82% over 2012; and adjusted EBIDTA of $138 million was up 3% year-over-year. These companies really like expressing their results as EBITDA rather than boring old net income. SeaWorld made progress in reducing long-term debt; it was down $180 million from year-end 2012 to approximately $1.7 billion.

Four straight years of growth -- and the economy still isn't that great

Cedar Fair's  (NYSE: FUN  ) properties include 11 amusement parks, five water parks and five hotels. Polls taken by the Amusement Today newspaper have named Cedar Fair's flagship park Cedar Point the "Best Amusement Park in the World." Knott's Berry Farm is another one of its well-known parks.

The company also reported record net revenue for the first half -- $403 million, a 5% increase over 2012. Management stated its confidence that the company will achieve record full-year revenue for the fourth consecutive year. Company officials cited a positive guest response to new rides and entertainment attractions as a key driver of the strong revenue performance.

Cedar Fair CEO Matt Ouimet, however, was quick to give credit to the "quality of service our employees provide." The company's "wow the guests" strategy included new attractions, such as a winged roller coaster called GateKeeper, incentivising the group business sales force, and an enhanced e-commerce platform. Per capita spending was up 5% to $42.17. Attendance declined less than 1% compared to the first half of 2012.

Cedar Fair demonstrated excellent cost management. Operating expenses as a percent of net revenue decreased, and EBITDA increased a healthy 19% to $86.8 million. It's an accounting thrill ride to see how the company arrives at this number after starting with a $62 million net loss. The main attractions are: add back $52 million of interest expense, $51 million in depreciation, and a $35 million loss on early extinguishment of debt. Cedar Point's long-term debt was $1.6 billion at the end of the second quarter, down $64 million compared to the year-ago quarter.

Sharing with shareholders is always good

Six Flags (NYSE: SIX  ) , operator of 18 parks, joined the chorus of record-setting revenue announcements for the first half, reporting a $10 million, or 2%, increase over the prior year to $451 million. 

Guest spending per capita grew just 1% through the second quarter to $39.74. Six Flags was able to show an attendance increase, although it was a modest 1%.

Modified EBITDA rose from $109.6 million to $120.5 million. After incurring a net loss of $24 million the first six months of 2012, Six Flags earned a net profit of $4 million so far this year. This $28 million improvement resulted in an $11 million gain in EBITDA because an interest expense was significantly higher this year. Net debt was $1.2 billion at the end of the quarter, up from $776 million at the end of last year.

In the first two quarters of the year, Six Flags paid stockholders dividends of $88 million and repurchased $404 million of common shares. Another bright spot, cash-flow wise, was that sales of season passes and membership plans increased $23 million to $130 million.

What we learned

Each of these well-established amusement-and theme-park operators merits consideration by investors. They have a wonderful advantage called "already being there." The cost for competitors to enter the market and build their own theme parks would be enormous. In addition, each of the companies has a powerful brand name and positive brand image. Consumers flock to their parks, ready to spend.

The downside is that the sheer size and capitalization of these parks is a limitation to each company's growth. A restaurant chain can comfortably add 50 new franchise locations per year, for example. Theme-park operators have to try to build sales within their existing parks and add new parks slowly.

The lingering effects of the recession also can put the brakes on revenue growth. Going to these parks is not an inexpensive entertainment experience. As the companies reported, the per capita expenditure is $40 to $60.

The strategic goals for an amusement/theme park operator are straightforward: get more people into the parks and get 'em to spend more per person while they are there. To stay relevant to today's entertainment-seeking consumer, parks must continually add fresh attractions to dazzle visitors -- which requires spending dazzling amounts of money. This is a capital-intensive industry as reflected by the debt on the balance sheets of these companies.

About the stocks

SeaWorld's strategy of higher prices may result in continued year-over-year declines in attendance at a time when demand is increasing. A less crowded park, however, can mean a better overall guest experience. This would be my third choice.

Six Flags would be my second choice because of its revenue performance and the cash returned to shareholders.  The higher debt load and interest costs year-over-year, however, are red flags.

My favorite is Cedar Fair because of the diversity of the attractions it offers and because the company achieved the highest percentage increase in revenue.

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