The summer months are right around the corner. With warmer weather, people often enjoy tourist and recreation activities outside. Companies that offer outdoor recreation and entertainment may seem to give investors a great opportunity for returns. But, can any of the big providers deliver returns?
The big name
Six Flags Entertainment Corp (NYSE:SIX) owns and operates amusement parks in the United States, Canada, and Mexico. It has 16 parks in the United States and one each in Canada and Mexico.
Six Flags Entertainment Corp (NYSE:SIX) recently reported its quarterly earnings. Total earnings were a loss of $1.23 per share. Analysts were expecting a stronger loss of $1.57, so investors should at least be happy about that. The slightly lower loss was due to higher attendance rates during spring break across the country. Not only were there more visitors, each visitor ended up spending more money at the parks – two great signs for the summer season.
Six Flags Entertainment Corp (NYSE:SIX) recently underwent a bankruptcy turnaround. Emerging from bankruptcy, Six Flags Entertainment Corp (NYSE:SIX) has focused on eliminating some of its debt and operating on a stricter debt policy. Total shareholder’s equity has steadily risen in the last few years.
Is this enough for investors? Maybe. More people are entering the park and Six Flags Entertainment Corp (NYSE:SIX) announced that it sold more season passes than it did last year. The company may be able to draw in more revenue from in-park spending with more return visits.
The slightly smaller name
Cedar Fair, L.P. (NYSE:FUN) owns 15 amusement and water parks across the country. In addition to the amusement and theme parks, it also owns five hotels in the United States.
The stock price has steadily risen over the last two years as investors have recognized the strength of Cedar Fair, L.P. (NYSE:FUN)’s brand in local and regional markets. In the last year alone the stock has appreciated 37%. Investors should also note that Cedar Fair, L.P. (NYSE:FUN) pays a staggering 6% dividend yield with its annual dividend of $2.50 per share.
The company has seen both top line and bottom line growth in the last three years as more customers enter their parks. Earnings are expected to increase this year due to an expectation of big spending this summer at its parks. Analysts are expecting an increase of 30% in earnings per share, from $1.81 to $2.36.
If this growth were to occur and the stock kept trading at its current price to earnings ratio of 23.20, the stock would be valued at nearly $55 per share. This is highly unlikely. As the earnings increase, the price to earnings ratio will surely decrease. Six Flags trades at a P/E ratio of 11.60. Cedar Fair, L.P. (NYSE:FUN)’s stock will likely drop to a P/E ratio of 18-20, resulting in a stock price increase of 10% over the next year.
The new IPO
SeaWorld Entertainment Inc (NYSE:SEAS) recently had its initial public offering. With its debut, the company now has a market cap of just over $3 billion. The company operates 10 theme parks across the country.
The stock listed at $27 per share and is up already 23% in less than one week of trading. The private equity group The Blackstone Group L.P. (NYSE:BX) bought SeaWorld Entertainment Inc (NYSE:SEAS) in 2009 and grew its revenues and profitability each year since then. In 2012, SeaWorld had $1.4 billion in revenue and roughly $77 million in net income.
Investors should be wary of SeaWorld Entertainment Inc (NYSE:SEAS) more than the others. Five of its parks are all located in one area in Florida, so it is heavily focused on local and small-regional sales. The company is highly dependent on customers traveling to its primary locations.
Also, after this IPO, SeaWorld Entertainment Inc (NYSE:SEAS) still caries a large amount of debt – roughly $1.6 billion. The company has a high level of fixed expenses for running its parks. The expenses will be high regardless of the amount of attendees. This, coupled with high debt payments, make it a risky stock to hold.
The summer months may bring an increase in spending on entertainment and amusement parks. Investors should closely watch the attendance numbers and in-park spending at all three of these companies. Six Flags Entertainment Corp (NYSE:SIX) and Cedar Fair, L.P. (NYSE:FUN) are two stocks to look at buying, or at least holding for now. They have strong brands and more diversified geographic operations than SeaWorld Entertainment Inc (NYSE:SEAS). SeaWorld Entertainment Inc (NYSE:SEAS) looks like it will have an uphill battle of regionally concentrated revenues and high debt payments. This is not an IPO that I want to get involved with.
The article 3 Summer Stocks to Look At originally appeared on Fool.com and is written by Austin Higgins.
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