Roller coasters have their ups and downs, and the same can apparently be said about the country's leading amusement park operators. Goldman Sachs analyst Lizzie Dove initiated coverage of three of the largest operators of regional gated attractions on Wednesday, ahead of the industry's peak summer season.
The three stocks are apparently not all heading in the same direction. Dove initiated coverage of Six Flags (SIX -0.55%) will a sell rating. But her view of Cedar Fair (FUN -0.99%) and SeaWorld Entertainment (SEAS 0.68%), was far rosier: She kicked off coverage of those two operators with buy ratings. It's not typical to see polarized perspectives for operators in an industry that typically rises or sinks with the tide of regional consumer sentiment.
The seventh flag is a white one of surrender
Shares of Six Flags rallied earlier this month after the company posted its first-quarter results. The results may not seem impressive at first glance. Revenue rose a mere 3% year over year to $142 million, and its loss per share widened. However, the company's results exceeded expectations on both ends of the income statement, something Six Flags hadn't done in more than a year.
Also, red ink isn't problematic for the company at this time of year. Many Six Flags parks are closed through the first three months of the year. In 2022, it generated just 10% of its total revenue in the first quarter, and losses incurred in the period have historically been more than offset when business spikes during the spring and summer.
Goldman Sachs' Dove still isn't impressed by the operator of 27 different amusement parks and water parks across North America. Six Flags has taken an unconventional approach to its business since Selim Bassoul took over as CEO in late 2021. He has tried to upgrade the guest experience with higher prices to match, hoping to make more money from fewer guests. Attendance plummeted 26% in 2022, but revenue declined by just 9% as guest spending, admissions fees, and in-park spending per capita rose by 22%, 25%, and 18%, respectively. Earnings per share slipped 14% in 2022.
It's been more of the same so far in 2023, only revenue is starting to turn positive despite a 5% year-over-year dip in turnstile clicks in the first quarter. Dove sees execution risks in the turnaround strategy, conceding that this year's comparisons will be easier against the depressed results it delivered in Bassoul's first full year at the helm. Can Six Flags keep milking more out of its guests? Can advertising costs and new rides be bankrolled by a smaller audience? Dove initiated coverage of Six Flags with a sell rating, but her $26 price target is just above where the shares are now.
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Stocks worth riding
Dove is more upbeat about the prospects for Six Flags peer Cedar Fair and theme park operator SeaWorld Entertainment. The bullish case for the industry outside of Six Flags stems from its attractive valuations, which are below pre-pandemic levels. With the industry experiencing back-to-back years of rising demand following COVID-related shutdowns, Cedar Fair is taking a different tack than its rival Six Flags.
Revenue soared 36% last year on a 38% surge in attendance and a slight dip in in-park spending per capita. It bears pointing out that Cedar Fair took a more cautious approach to reopening in 2021, but it did post record annual earnings in 2022. Dove feels that Cedar Fair offers a strong park portfolio and a stable management team, in contrast to the revolving door at the Six Flags CEO office in recent years. Dove's $50 price target on the units implies an upside of 13%, and that's on top of Cedar Fair's dividend, which at the current share price yields 2.7%.
The new bullish case for SeaWorld Entertainment stems largely from its exposure to Central Florida, where roughly half of its theme parks and water parks are located. Because the larger theme parks in the area have boosted their admissions prices recently, SeaWorld finds itself with pricing power, and with little risk of losing the local audiences who see value in a SeaWorld annual pass over other theme park offerings. Her $75 price target on SeaWorld implies a whale-sized 34% gain from Tuesday's close.
This will be a critical summer for leisure stocks. Amusement park operators have offered necessary escapism following the pandemic-related closures, but consumer spending lately has started shifting toward essentials. Six Flags, Cedar Fair, and SeaWorld will need to earn their turnstile clicks this season, and there's a lot to gain for the players that succeed.
