While the cold weather through much of the U.S. has many people thinking we’re still lingering in winter, the start of Major League Baseball is a sure reminder that summer is just around the corner. And one of the busiest places come June will be your local amusement park.
Should you buy any of them? Well, that’s the million-dollar question, isn’t it?
Whether you invest in the two pure plays or through Disney’s Parks and Resorts division comes down to real estate. Think of it like a parking garage or a sod farm, where the operating activities ensure that the land pays for itself while its owners wait for it to appreciate. Eventually the land becomes so valuable that it’s sold for development.
For example, in 2009, Cedar Fair sold 87 acres of property adjacent to Canada’s Wonderland in Vaughan, Ontario, for $53.8 million, resulting in a $23.1 million gain. The remaining 290 acres are all spoken for by the amusement park. However, surrounded by homes on all sides, eventually it will be sold to developers for much more than the $618,000 per acre it got in 2009. Putting a value on those future revenues is the tricky part.
Cedar Fair and Six Flags are remarkably similar. In 2012, Cedar Fair’s revenues were $1.068 billion; Six Flags’ revenues were just $1.9 million higher. In terms of land, Cedar Fair has a total of 5,029 acres developed and undeveloped, while Six Flags owns a total of 4,858 acres. Even profitability is a horse race, with Cedar Fair’s EBIT coming in at $232.6 million compared to $260.4 million for Six Flags.
The big difference between the two companies is that Cedar Fair hasn’t been through a bankruptcy within the last five years, while Six Flags emerged from one on April 30, 2010. That being said, Cedar Fair has more debt than Six Flags ($1.53 billion vs. $1.4 billion) and at higher rates of interest.
All the way around, it’s tough to tell the difference between the two.
However, there’s no mistaking Disney’s Parks and Resorts division. In 2012 (September fiscal year-end), it generated $12.9 billion in revenue and operating income of $1.9 billion. It owns approximately 28,866 acres in Florida, California, Hawaii, France and China. A majority of those acres — 25,000 — is in Orlando where the Magic Kingdom, Epcot, Disney’s Hollywood Studios and Animal Kingdom are located. Someday — probably not in my lifetime — those acres are going to be incredibly valuable.
Heck, they are today.
Rumors in recent years that Disney would sell this business are largely unfounded, although the capital expenditures required to run its parks and resorts is much higher than any of its other divisions. In 2012, DIS spent almost $2.9 billion to generate $1.9 billion in operating income. Conversely, its media business, which includes ESPN, invested $255 million in 2012 to generate $6.6 billion in operating income.
There’s no question which business makes more economic sense. However, the parks help sell the brand and keep Disney front of mind, so they’re not going anywhere.
All that considered, which is the best stock?
Even that really depends on what you’re trying to accomplish by making this investment.
If you think amusement parks and other leisure facilities are going to be busy this summer, then a pure-play is probably your best bet. Of the two, I’d go with Cedar Fair — mostly because it has a better history of delivering consistent revenues and profits than Six Flags.
Further, because it’s operated as a limited partnership, FUN distributes all of the profits to the partners untaxed; depending on your tax rate, it could result in a better yield than if you received dividends from a corporation. But that’s a question for your tax adviser.
Now, if we’re talking about the best investment, there’s no question that Disney is the choice du jour.
In November, I discussed the idea of spinning off ESPN into a separate company. It is truly the gem of the Disney empire, and its value alone makes Disney a good long-term play. Buy Disney stock today, and should it spin off ESPN down the road, you can always reassess whether you want to hang on to the remaining assets … which of course include its parks and resorts.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.