Which Theme Parks are The Most Fun for Investors?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Cedar Fair (NYSE: FUN) has experienced a good rise since the beginning of the year, up nearly 26.40%, much higher than the S&P 500’s gain of around 18.60%. Income investors must love Cedar Fair, with its consistent dividend payment history and high dividend yield. At the current trading price, Cedar Fair offers its shareholders quite a juicy dividend yield at 5.9%. Let’s take a closer look to see whether or not Cedar Fair is a good buy now.

A cash cow with decreasing leverage

Cedar Fair is a publicly traded limited partnership, operating around 11 amusement parks, four outdoor water parks, one indoor water park and five hotels, serving more than 23 million visitors in 2012. Cedar Fair derived its revenue from two main sources: ticket sales, and food & merchandise sales. Most of its revenue, $612.1 million, or 57.3% of the total sales, were generated from admissions, while the food, merchandise and game sales contributed around $342.2 million, accounting for 32% of the total 2012 revenue. According to Broyhill Asset Management, Cedar Fair had a high amount of “day-tripping” visitors who were living nearby, rather than the long-distance visitors of destination parks. Thus, it was a more stable business with a stronger recurring revenue stream, especially in these difficult economic times.

What I like about Cedar Fair is its cash-generating capabilities. In the past ten years, Cedar Fair has managed to generate an increasing cash flow. While operating cash flow increased from $135 million in 2003 to $286 million in 2012, its free cash flow rose from $95 million to $190 million during the same period. Interestingly, the company was also successful in bringing down its debt level. In 2009, its net debt/EBITDA was more than 5.2. Its net debt/EBITDA is expected to decrease to around 3.5 in 2013. Cedar Fair is trading at $42.30 per share, with a total market cap of around $2.4 billion. The market values Cedar Fair at more than 10.2 times its trailing EBITDA.

Enjoys the lowest valuation among its peers

Compared to its peers SeaWorld Entertainment (NYSE: SEAS) and Six Flags Entertainment (NYSE: SIX), Cedar Fair is the cheapest valued among the three companies. SeaWorld Entertainment is trading at $38.30 per share, with a total market cap of nearly $3.6 billion. The market values SeaWorld at more than 13 times its trailing EBITDA. SeaWorld owns and operates 11 theme parks in the U.S. under several famous brands, including SeaWorld, Shamu and Busch Gardens. It generated most of its revenue, $884.4 million, or 62% of the total revenue, from admissions. SeaWorld had a higher leverage level than Cedar Fair at around 4.2 times its net debt/EBITDA. For the full year 2013, SeaWorld expects to deliver around $1.46 to $1.49 billion in revenue, with an adjusted EBITDA of around $430 million to $440 million. At the current trading price, SeaWorld offers a much lower dividend yield than Cedar Fair at 2.10%.

Six Flags Entertainment also has a higher valuation than Cedar Fair. At $35.80 per share, Six Flags is worth around $3.40 billion. The market values Six Flags at 12.6 times its trailing EBITDA. Six Flags is considered the biggest global regional theme park operator, with 18 regional theme and water parks in the U.S., Mexico and Canada. The company also derived the majority of its revenue, $576.7 million, from admissions, while food and merchandise sales ranked second at $437.4 million. Being a regional theme park operator, Six Flags reported that it had high recurring revenue and the business was resilient in a weak economy.

What I like about Six Flags is its relatively low financial leverage, with the net debt/EBITDA at around 3. Moreover, Six Flags has just recently emerged from bankruptcy in 2010, so it recorded a lot of NOLs (net operating loss carryforward). The NOLs could save the company from paying taxes in the next five years or more, allowing the company to return more cash to shareholders. Looking forward, Six Flags expects that it could deliver as much as $500 million in adjusted EBITDA, or around $6 of cash EPS by 2015. At the current trading price, Six Flags also offers investors a juicy dividend with a high yield at 5%.

My Foolish take

Theme park companies could be considered cyclical and capital-intensive businesses. It is not very easy to reduce their high fixed operating costs, so instead the businesses should be focusing on raising revenue by attracting more people to the parks to sell more tickets and more food & beverages. I personally do not think that it is a good business to own in the long run. If investors are craving for good yields, they should choose Cedar Fair among the three, due to its highest dividend yield, reasonable leverage and the lowest valuation.

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Anh HOANG 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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