People need diversions from the stress of their everyday lives. No wonder people take vacations and day trips.
But companies in the leisure industry often see their results fluctuate based on the economic cycle. That's because people's willingness to spend on discretionary items varies depending on their job situation.
However, for long-term investors willing to hold on during challenging times, this could present an opportunity. Royal Caribbean (RCL 7.00%) and Six Flags Entertainment (FUN +1.13%) offer two different experiences to their guests. Should you add one or both stocks to your portfolio, with an eye toward holding them for Warren Buffett's favorite horizon (forever)?
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Royal Caribbean
Royal Caribbean operates cruises under its namesake, Celebrity, and Silversea brands. These each appeal to different demographics, with Royal Caribbean aimed at families and premium, Celebrity at the premium segment, and Silversea appealing to the ultra-luxury market.
Royal Caribbean generates most of its revenue from passenger ticket sales, although onboard revenue, such as pre- and post-cruise tours and gambling, makes up about one-third of the company's top line.
As you might expect, Royal Caribbean struggled during the pandemic's height, when people stayed home. However, those were exceptional circumstances, and the company has rebounded strongly.
The company recently reported fourth-quarter results, capping off a strong year. Capacity remained strong, helping drive 13.2% year-over-year revenue growth to $4.3 billion. This year has gotten off to a good start, with two-thirds of the capacity already booked.
With this strong demand, Royal Caribbean plans to launch four new ships by 2028.
Six Flags
In July 2024, Six Flags and Cedar Fair merged. As the largest regional theme park operator in North America, it has 26 amusement parks, 15 water parks, and nine resorts. Most of its parks are located in the United States.
However, the company's larger size hasn't translated into a better-run company. Third-quarter attendance increased 1%, but spending per person fell 4%, with both admission and in-park spending dropping. This helped push Six Flags' Q3 revenue down 2.3% year over year to $1.3 billion.
Management's strategy to turn around operations includes enhancing the guest experience by focusing on the value proposition, cutting costs, efficiently managing capital expenditures, and selling non-core assets. Ultimately, it hopes to drive higher attendance and spending by improving the guest experience.
While cost-cutting should be fairly easy to accomplish, driving higher ticket sales and traffic remains challenging, given consumers' many entertainment choices.
Should you make the commitment?
I'd stay away from Six Flags' shares. The stock lost 60.5% over the last year through Jan. 23, while the S&P 500 index gained 13.4%. However, given the company's operational challenges, I wouldn't view this as a buying opportunity.
NYSE: FUN
Key Data Points
On the other hand, Royal Caribbean's stock gained 23.3% during this period, beating the S&P 500 by about 10 percentage points. The shares trade at a more attractive valuation, however, with the price-to-earnings (P/E) ratio dropping from 22 to 19.
NYSE: RCL
Key Data Points
Does this translate into buying and holding the stock forever? Things have been going well, and Royal Caribbean has been expanding its fleet. With a reasonable valuation, I'd purchase the shares for the long haul, although a lifetime commitment may be a bit much given changing consumer tastes and potential competitive threats.
