Are You Daring Enough to Invest in This Theme Park?

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Are you prepared to brave the new Texas Giant, the wooden El Toro, or the steel Bizarro rollercoasters? If that's not enough, then perhaps you should consider Kingda Ka, the tallest and fastest thrill ride in existence, or Full Throttle, the fastest looping rollercoaster at 70 m.p.h. And if that's not enough, consider investing in Six Flags (NYSE: SIX).

This doesn’t necessarily mean you will make money.  Like a rollercoaster, Six Flags may move up and down at intense speeds.  This is a cyclical business, so many investors may think now is the ideal time to invest.  So let's take a look at the Six Flags situation, let's see if it presents a good opportunity, and whether one of its peers might make a better bet.

The backstory

When Six Flags went bankrupt four years ago, it looked like any hope for future success had been destroyed. Many people expected its rollercoasters to be shut down and for weeds to claim the land (prior to the land being sold). But the story took a different turn. 

Coming out of bankruptcy and armed with $1.5 billion, due to restructuring, Six Flags implemented a new strategy. Instead of relying on existing rides and moving into the entertainment business, it consistently opened new rides to drive repeat traffic.  It also refocused on its core operations.

Today, Six Flags is relying heavily on customer surveys for improvements. If a complaint or suggestion comes in, then a change will be made to please the customer. So yes, your opinions do matter.

Furthermore, Six Flags is now very focused on efficiency as well as returning capital to shareholders. The goal of becoming more efficient looks as though it’s being achieved, as supported by its profit margin of 37.25%. In regards to returning more capital to shareholders, Six Flags currently yields a 5% dividend.

While returning capital to shareholders is a selling point, it’s also expensive. It will be interesting to see if Six Flags can maintain such a high yield if growth begins to slow.  It should also be noted that all Six Flags employees are shareholders, which is a big plus as it keeps employees motivated.

Six Flags vs. peers

Six Flags owns and operates 18 amusement parks -- 16 in the United States, one in Mexico, and one in Canada. Its amusement parks offer thrill rides, water rides, games, concerts, and shows. Revenue has consistently improved over the past three years, and earnings went from a small loss to a large gain between 2011 and 2012. It looks as though new strategies have been paying off. Six Flags is trading at 9 times earnings.

Cedar Fair (NYSE: FUN) owns and operates 16 amusement parks as well as five hotels in the United States. Cedar Fair’s revenue has improved over the past two years, and those years have been profitable.  But Cedar Fair is highly leveraged, and it’s currently trading at 40 times earnings.

Cedar Fair yields 6%, but considering its weak balance sheet and questionable growth rates, it’s possible for the dividend to be cut in the future.  It's currently carrying $1.5 billion in long term debt and pays out more than $100 million per year in interest expenses.

SeaWorld (NYSE: SEAS) owns and operates 10 amusement parks in the United States.  It recently went public, and the company reported losses in its last two quarters. It’s not as highly leveraged as Cedar Fair, but debt is a concern, making it high risk. SeaWorld is trading around 36 times earnings, and it yields 2.10%.

Shares opened at $27, and on the first day of trading, the stock was up almost 30%.  It used the proceeds from the IPO to pay down some debt and pay off an advisory firm.  Now it's looking to leverage its brand to develop new revenue streams.

Conclusion

SeaWorld and Cedar Fair may be too leveraged for your liking, so before you take the plunge be sure to do your own due diligence.  But if you're looking for a profitable ride, consider Six Flags.  Just be aware the stock has sold off lately, so you may be able to get in at a better price. 

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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