Shares of SeaWorld Entertainment (SEAS 1.10%) jumped as high as 20% by 1 p.m. on Monday, April 27, before giving back some of its gains. Amusement park peers Six Flags Entertainment (SIX 0.29%), Cedar Fair (FUN 1.17%), and Walt Disney (DIS -1.83%) also rose dramatically, hitting gains of 15%, 10%, and roughly 4.5%, respectively, around 1 p.m. They, too, started to pull back a little after that peak. There was no specific news about any of the individual amusement park owners that drove the sharp rise. It was all related to investor excitement surrounding what appears to be the initial stages of COVID-19 social-distancing restrictions being eased.
There wasn't really a dramatic shift in any of the social distancing and stay-at-home rules in any of the states; it was simply a couple of states starting to allow nonessential businesses to reopen after being forcibly shut to help slow the spread of the coronavirus pandemic. Other states began to discuss the same idea with a bit more intensity than before but didn't actually change their current position on social distancing.
This is good news for SeaWorld, Six Flags, Cedar Fair, and Disney, without a doubt. Since amusement parks are definitely not essential, they were shut down, too. And since amusement parks without guests don't generate any money, their being shut down created a massive financial problem. None of these companies has specifically announced that it has reopened, but just the idea that the shutdowns might eventually be over was enough to get investors excited about this niche consumer sector again. That said, long-term investors shouldn't get caught up in the excitement. There's still a long way to go before these businesses will get back to anything like "normal" operations.
In fact, other than Disney, these companies have few if any sources of revenue outside of their amusement operations. And even Disney's other businesses aren't that much help today since theaters aren't showing movies, sports are largely on hold (a big issue for ESPN, where the biggest draw right now is a documentary about Michael Jordan), and the company's hotels and cruise ships are also closed for business. Disney+ has been a notable positive, as it picks up subscribers who are stuck at home under social-distancing guidelines, but that will not be enough to offset the pain from the other sectors when earnings come around.
SeaWorld, Six Flags, and Cedar Fair, meanwhile, have gone into survival mode. (Interestingly, or perhaps troublingly, SeaWorld's CEO recently stepped down after just five months on the job.) With their facilities shut, they've reduced staff, cut costs, and in some cases eliminated shareholder disbursements. Each, meanwhile, has worked to shore up its capital position in other ways, too. That's included working with lenders to update credit facilities and issuing debt. So far, lenders appear to be supporting their efforts to weather this storm.
The general idea is to strengthen balance sheets enough to withstand being shut for at least part of the spring and summer. That is, without question, the most important time of year for these seasonal businesses. Outside of Disney, which has a fairly modest financial debt-to-equity ratio of 0.2 times, the other three amusement parks here have notable leverage -- all are in the 0.6 to 0.7 times financial debt-to-equity space. In other words, while getting access to additional capital is a good thing in the near term, investors need to keep an eye on leverage once the COVID-19 issue passes.
Indeed, the extra debt will need to be paid off at some point, and the additional interest expenses will have to be carried until it is. Once again, there's a big difference here between Disney, which covered its 2019 interest expenses 12 times over, and the rest, which had interest coverage ratios between 2.5 times (SeaWorld) and 3.8 times (Six Flags). If the parks don't reopen, though, these companies won't be bringing in any revenue, and those coverage figures will fall dramatically. In fact, those figures are likely to fall even under a best-case scenario, which is what investors appeared to be thinking about as they bid the stocks higher.
Aside from Disney, which is relatively strong financially and far more diversified, the amusement park operators are very risky investments today. A little upbeat news and a day with big stock gains don't change that. Indeed, even after they are allowed to reopen their parks, these companies will have headwinds to worry about. That includes increased cleaning costs, new policies to ensure guest safety (that will likely reduce attendance), and lingering health concerns that might keep park visitors away for an extended period.
The 2020 season is probably going to be very painful no matter what happens from here. Most investors will want to err on the side of caution and avoid SeaWorld, Six Flags, and Cedar Fair until there is far more clarity. Disney is a more complicated story because of the diversified nature of its business. But go in with your eyes open. There are very real risks even at Mickey Mouse's house.