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Theme-Park Stocks Thrill as Consumers Loosen Up

Michael Santoli

The one-year charts of amusement-park company stocks look like roller coasters that only go up, at a steep angle.

Cedar Fair LP (FUN) and Six Flags Entertainment Corp. (SIX) are trading at 52-week highs and have gained 50% and 68% in the past year, respectively. SeaWorld Entertainment Inc. (SEAS) shares are up 37% to about $37 in the three weeks since its initial public offering was priced at $27 each.

Roller coaster

These theme-park operators thrill investors who these days covet companies with a couple of key attributes: They do all their business in North America and benefit directly from peppier spending by Americans, who are enjoying firmer employment trends, recuperating housing markets, moderate gas prices and reduced debt burdens.

Having a few extra bucks and the confidence to spend, more Americans are taking a day or two to check out the latest taller-and-faster roller coaster at a regional amusement venue.

“The leisure industry, to some degree, helped lead the country out of recession,” Cedar Fair President and CEO Matthew Ouimet said in an interview with Yahoo! Finance. “I don’t want to overstate it, but people have been working hard, and spending a couple of days in the summer [at a regional theme park] is a way to say we are back to normality.”

Expanded season

Cedar Fair had record opening-weekend attendance at its flagship Cedar Point park in Ohio last weekend, as he told CNBC’s Jim Cramer on Monday. The company is forecasting that 2013 will be its fourth consecutive year of record park traffic.

Ouimet believes the idea of a “staycation” has gone from a belt-tightening decision made by necessity to an enduring revival of the road trip mentality among families looking for “together time” without the increasing hassle of air travel.

The regional theme parks enjoy pretty good business fundamentals when consumers are feeling OK. Essentially, no new theme parks are likely to be built, given the expense, land restrictions and such. Only one such launch, in Myrtle Beach, S.C., was attempted in the past 20 years and failed quickly, says Ouimet. Technology has allowed ever-faster, more sophisticated thrill rides – so much so that engineers are constrained not by what they can build but what riders can handle. Enclosed “dark rides” can now become real-life video games, using GPS technology and shooter-game software.

Ouimet notes that the explosion in the popularity of Halloween activities has proven to be a big growth opportunity. Parks that used to close after Labor Day now do some of their best business with haunted Halloween events. Nearly 40% of admission revenue last year came from season-pass buyers, a proportion that keeps growing. Season-pass holders tend to spread out their visits across off-peak days and act as good proselytizers for the parks.

Expansion opportunities are attractive at some of Cedar Fair’s 11 major parks, where multi-year capital-spending plans are in place to enhance offerings among and keep the mix fresh among thrill rides, family attractions and water features. Carowinds in Charlotte, N.C., for instance, contains a lot of land that can be used to build out the park along with that region’s fast-growing population over the coming decades.

The fair bet

Each of the publicly traded amusement-park operators has undergone hard times or ownership turmoil at some point. Six Flags was over-indebted and poorly operated heading into the 2008-2009 recession and went through bankruptcy. It was acquired by investment firms out of Chapter 11 protection, then taken public in May 2010.

SeaWorld was long owned by Anheuser-Busch as a sideline to its beer business. When Anheuser-Busch entered the merger that created Anheuser-Busch InBev SA (BUD), it sold the parks to Blackstone Group (BX), which focused more on the bottom line and enhanced marketing, before the IPO in April.

Cedar Fair, while always a steady operator, was forced to suspend its cash distribution to stockholders in 2009, because of the financial crisis, under lending-agreement terms. Cedar Fair has an unusual corporate structure as one of a handful of publicly traded limited partnerships grandfathered in under tax law.

It distributes a large portion of its available cash flows to shareholders, and has always been a high-yielding favorite among income-seeking investors. Its yield, even after the stock’s run to new highs, remains just under 6%. Ouimet extols the stock’s yield-plus-growth characteristics, which have borne out over the years. (There are quirky tax implications of collecting the partnership distributions, which investors should be aware of.)

Six Flags and SeaWorld, while enjoying some of the same strong fundamentals, have stock valuations that appear rich, at 12 to 13 times the past year’s cash flow, which should cap their upside. Cedar Fair is valued more modestly, though probably in part because of its partnership structure.

While the zeal for high-payout partnership stocks has appeared overheated at times, Cedar Fair looks like a fair bet given the steady profitability of the core business and room for measured growth in the cash distributions.