Despite a lot of conciliatory noise from the Federal Reserve, the broad markets just can’t seem to pull together a sustained rally.
Between the bottom of February and March end, the benchmark exchange-traded fund SPDR S&P 500 ETF Trust (SPY) gained nearly 13%. But in April, the SPY literally fell flat for the month. Typically, that has poor implications for consumer spending. Yet some discretionary sectors, particularly theme parks, have seen a boost in sales. Rather than a one-off phenomenon, theme parks stand to benefit further from bullish tailwinds.
Seasonality is one of the more obvious factors that investors are looking to exploit. During the past decade, the Dow Jones U.S. Travel & Tourism Index — which tracks leading travel stocks like Priceline Group Inc (PCLN) — has an uncanny tendency to crater in the first quarter only to rebound sharply in the fourth. Shares of airline companies and hotels exhibit similar patterns. What this suggests is that, good economy or not, Americans want their vacation. And that’s a net positive for theme parks.
True, macroeconomic weakness and stagnant wage growth have rained down on an otherwise rising labor market. However, some of the pessimism is offset by multi-year lows in gasoline prices. Cheaper gas is encouraging more Americans to hit the road, and Wall Street fund managers are taking big bets on the domestic tourism industry. With increased traffic and a net lift in discretionary spending power, theme parks have their welcoming arms wide open.
It’s not just a localized trend, either. The Walt Disney Co (DIS) — inarguably the king of theme parks — is opening up a huge Magic Kingdom resort in Shanghai in a little over two months’ time. To ensure success for its $5.5 billion venture, Disney announced that it will hire 10,000 workers. As with the U.S., China is struggling with multiple economic challenges. However, like Americans, the Chinese want their vacations, and theme parks are simply part of that deal.
Back home, popular theme parks are witnessing a healthy rise in attendance leading up to the summer season. More than just a singular asset, companies are starting to come around to the potential synergy between entertainment brands and higher revenues for theme parks. For example, the opening of the Wizarding World of Harry Potter ride at Universal Studios Hollywood saw a 21% hike in ticket prices.
That trend should only get stronger as theme parks provide an entertainment experience that other mediums simply can’t duplicate. Here are three theme parks that investors can buy for both fun and fortune!
Theme Parks to Buy: Six Flags Entertainment Corp (SIX)
Click to Enlarge Any discussion about investing in theme parks must first and foremost include the “world’s largest regional theme park company,” Six Flags (SIX), which operates 16 locations in the U.S and two more internationally — one in Mexico City, the other in Montreal.
SIX stock moved up sharply last week when it released better-than-expected results for its first quarter of fiscal year 2016 earnings report. Against a consensus-target loss of 66 cents per share, SIX instead shed 51 cents — the smallest loss ever recorded in the first quarter. In the year-ago period, SIX lost 75 cents. The positive surprise factored in a total revenue jump of 36% year-over-year, with ticket sales surging 43%.
Of course, SIX stock is poised to do well over the next few months as lower gas prices will almost surely drive attendance rates higher. But the long term is where things get really exciting. Last March, SIX announced a partnership with a Vietnamese entertainment company to build two Six Flags-branded theme parks in Vietnam. Further, SIX is planning on opening another location in Shanghai — an area that has proven to be eagerly receptive to American theme parks.
Six Flags is already a powerhouse among theme parks. With its aggressive international expansion, it’s about to become even stronger.
Theme Parks to Buy: Cedar Fair, L.P. (FUN)
Click to Enlarge Don’t let the lower profile of Cedar Fair (FUN) fool you. What it lacks in household name recognition, it more than makes up for in synergy. Continuing its fruitful relationship with Electronic Arts Inc. (EA), FUN is setting up a new ride based on the Mass Effect video game franchise.
The attraction will open later this month in California’s Great America theme park. Featuring state-of-the-art technology designed to enhance the ride-goer’s experience, FUN has been at the forefront of leveraging the power of branding with the physical medium of theme parks.
The strategy has definitely paid off in terms of financial strength. FUN stock is supported by industry-leading profitability margins, as well as an exceptionally high return on equity. Since 2010, annual revenue growth has been relatively consistent at 5%. Better yet, it appears that momentum has been brewing recently. On a YoY basis, FUN stock has grown an average of 8% in every quarter of FY2015.
Of course, the financials would be an afterthought if FUN didn’t deliver in the markets. Fortunately, Wall Street has a fairly optimistic outlook. Year-to-date, FUN stock is up 5%. Over the past three months, shares have really moved, gaining 10%. Currently, shares are stuck in a sideways consolidation pattern ahead of its Q1 earnings report. But if FUN continues to do what it does best, it has a good chance of moving higher still.
Like its ticker suggests, Cedar Fair is about fun — and that appears to carry a healthy premium these days.
Theme Parks to Buy: SeaWorld Entertainment Inc (SEAS)
Click to Enlarge As one of the premiere operators of aquatic-life theme parks, SeaWorld (SEAS) would ordinarily have a decided advantage in the markets. However, since 2013, all anyone can talk about was the shocking documentary Blackfish, which exposed the callousness of SeaWorld’s orca-breeding program.
After a protracted public relations battle — and subsequent collapse of SEAS stock — the company relented and announced the closure of its breeding program. Recently, SEAS went a step further and announced the end of unnatural orca choreography. Will that be enough to win back the public’s favor?
It very well may have. Although ardent animal rights advocates press for further concessions — including the cessation of breeding programs involving other marine life species — SEAS has won praise from less militant activists. Ultimately, SEAS is pushing for a middle ground. In a recent interview, SeaWorld head Joel Manby acknowledged that certain activist organizations will never be satisfied. However, the concessions that were already made confirm SeaWorld’s commitment to responsible, family-oriented theme parks — a message that should resonate with both consumers and investors.
Having won tough battles with the American family’s conscience, SeaWorld has its sights set on a more practical target — the American family’s wallet. Pricing for Comcast Corporation (CMCSA) and Disney-owned theme parks have simply gotten outrageous, giving SeaWorld ample opportunity to undercut its competitors by a hefty margin. In addition, SEAS plans to develop thrill rides in its Orlando location to diversify its value proposition.
Undoubtedly, SEAS has had a rough three years. Its turnaround efforts are gaining traction, however, making SeaWorld a worthwhile risk.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.