Cedar Fair Or SeaWorld Entertainment For Better Returns?

SeaWorld Entertainment stock (NYSE: SEAS) has increased by 7% in the last two and a half years, when the stock price increased from $14 at the end of 2017 to $15 currently. But hang on, close rival Cedar Fair stock (NYSE: FUN) has seen a decline of 53% during the same period. And this is despite the fact that Cedar Fair’s revenue and margins have consistently been higher than SeaWorld Entertainment’s. How then is there such a divergence in the stock price trend? Our dashboard Cedar Fair vs. SeaWorld Entertainment: Does The Stock Price Movement Make Sense?  has the underlying numbers.

Sure, FUN’s revenue has been higher and has grown at a faster rate of 11.6% from $1.3 billion in 2017 to $1.5 billion in 2019, compared to 10.7% growth in SEAS’ revenues from $1.3 billion to $1.4 billion. At the same time, FUN’s margins have been higher than SEAS in all the previous three years. But the key factor here is the trend in margins. FUN’s profitability has deteriorated in recent years as net income margins fell from 16.3% in 2017 to 11.7% in 2019. Margins dropped sharply in 2018 mainly due to base effect (2017 margin was unusually high due to tax benefits received) and foreign exchange losses coupled with change in fair value of derivative instruments in 2018, and recovered to 11.7% in 2019. In contrast, SEAS has seen a continuous improvement in profitability as margins improved from -16% in 2017 to 6.4% in 2019, as margins were unusually low in 2017 due to goodwill impairment which explains the sudden rise in 2018, but the margin continued to improve in 2019 as well, driven by lower operating expenses on account of reduction in labor costs as the company focused on cost efficiencies.

Improving efficiency and margins have led to SEAS enjoying a much higher P/E ratio compared to FUN over the last 2 years. With the outbreak of coronavirus affecting the operations of both companies, we saw a decline in P/E multiple for both theme park giants. However, SEAS’s current P/E ratio of 14x is higher than FUN’s 9x.

How Have Businesses Of SEAS and FUN Fared Amidst Coronavirus?

Let’s have a closer look at the core business prospects. Both companies operate large theme parks catering to children and families. In the case for both the companies, almost their entire revenue comes from these park admissions, and merchandise & food (which in turn depends on footfalls at the theme parks). With almost all major cities being locked down due to the spread of coronavirus, there has been a slowdown in economic and industrial activity. The ongoing lock down of major cities and resulting economic slowdown has adversely affected the company’s theme parks business, which has virtually seen idle rides and empty properties due to a complete shutdown. With the US being the most affected during this crisis, both companies are expected to take a massive hit on their top and bottom line in 2020, as their facilities have been shut since mid-March. The lockdown seems to be having a much more adverse effect on FUN and SEAS in comparison to rivals like Disney, mainly due to revenue mix of these companies – as only 38% of Disney’s revenues are contributed by parks and resorts compared to 100% for FUN and SEAS. Find out how Disney’s stock has moved over recent times.

However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. compared to the rate seen in April-May to bolster market expectations. Following the Fed stimulus — which helped to set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results.

With the lifting of the lockdowns, and as the economy opens up, we believe that Cedar Fair would benefit more in the near term as the company has come out with a schedule to restart its facilities. Worlds of Fun in Kansas City reopened on 22nd June and the company has announced the schedule of the gradual reopening of other facilities through the month of July. This has made investors hopeful about the company’s recovery beginning in Q3 and Q4 2020. The news of recent surge in Covid-positive cases in the US could prove to be an impediment on the way to recovery in FUN’s stock, especially if the lockdowns are re-imposed, in which case the stock could again decline. However, as investors’ focus has shifted to 2021, in the absence of another lockdown and if there are signs of abatement of the crisis during Q3 2020, Cedar Fair’s stock could see a sharp rise from its current level. In contrast, SEAS’ facilities are still shut and a clear roadmap on reopening is not yet out. Under these circumstances, with the gradual removal of lockdowns and in a post-Covid scenario, we believe that FUN’s P/E multiple has an opportunity to see a higher increase, with the stock price expected to go up to between $35-$40, thus providing a potential return of around 40%. In comparison, SEAS’ stock could also rise to around $19-$20 with a potential return of 25%-30%, but is likely to underperform Cedar Fair in the near term.

While FUN’s stock could outperform SEAS, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

For further insight in to the theme parks segment, see how SeaWorld Entertainment and Six Flags Entertainment compare with each other.

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