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Amusement Parks and Attractions

Amusement park stocks take investors for ride

Matt Krantz
USA TODAY

It's been quite a rollercoaster ride for most investors this year - but amusement park investors are doing more smiling than screaming.

CMO Samsung, Marc Mathieu attends Samsung debut of the first virtual reality coaster powered by Samsung Gear VR at Six Flags Magic Mountain on March 25, 2016 in Valencia, California.

Shares of the big regional theme park operators Six Flags Entertainment (SIX) and Cedar Fair (FUN) are up 5.6% and 4.2%, respectively, this year -- and that doesn't even include their thrilling 4% and 5.6% annual dividend yields. Compare that to the 0.1% rise in the Standard & Poor's 500 index this year and its roughly 2% dividend. It's not just the regional operators benefiting from strong theme park attendance. Walt Disney (DIS) may have missed first-quarter earnings expectations, but that wasn't because of the company's parks. Operating income at Disney's U.S. theme parks was up 20% from the same period last year and spending per person rose 8%.

Analysts remain bullish on the amusement business heading into the busy summer season as amusement park operators aggressively build new attractions and inject new technology like virtual reality (VR) into their parks this year. Disney is about to open a park in China and Six Flags and Cedar Fair are upgrading rides to equip them with white-knuckle virtual reality thrills.

"Look at the rides and attractions. It's as impressive as a line up as I've ever seen," says James Hardiman, analyst at Wedbush Securities. "This type of entertainment  - experiences with family - is gaining in popularity. The rides and attractions are resonating."

Six Flags is perhaps the best example of how the amusement park business is giving investors the ride of their lives. The company, which operates 16 theme parks in the U.S., has seen its shares soar 22% the past twelve months as the company has beaten profit expectations the past four quarters in a row. The company's revenue jumped 36% in the first quarter to $115 million and analysts think it will be 8% higher for the year at $1.4 billion, says S&P Global Market Intelligence. Six Flags is adding attractions using VR technology from Facebook's (FB) Oculus Rift and Samsung at nine parks this season, says Barton Crockett, analyst at FBR & Co. New technology should boost cash flow by 6% and attendance by 2%, Crockett says. "VR is extending the life of old coasters and injecting greater freshness," he says.

Talk about a bottom to top ride. Six Flags' free cash flow hit $350 million the past 12 months, a dramatic reversal from 2010 when the company burned $30 million in cash. The company had filed for bankruptcy protection in 2009.

The ability to refresh rides using technology, rather than just spending $15 million to $20 million to construct entirely new roller coasters, highlights the profit power of these businesses, says Timothy Conder, analyst at Wells Fargo. Regional theme park operator stocks have also become even more attractive as investors appreciate the fat dividends they pay and the relative stability of the businesses. Regional theme parks' revenue can hold up during an economic downturn because more consumers skip pricey vacations and take local trips. But if the economy is strong, consumers will go to the theme park and also take the exotic vacation.

That's not to say the industry doesn't have its challenges. SeaWorld (SEAS) shares are down 17% the past 12 months as the company bowed to a public backlash against its killer whale exhibits. Analysts still rate the stock a "hold" as the company plans to phase out its once marquee orca shows. But going forward, the company is using two strategies to win back consumers, Conder says. SeaWorld will emphasize its animal research and conservation efforts in its exhibits. It also plans to broaden its appeal by adding thrill rides.

Another wildcard is whether the expansion will cause the market to be oversaturated with entertainment. Comcast's NBC Universal just opened a theme park expansion based on Harry Potter in Los Angeles. The industry is hoping the new attraction will boost interest in theme parks in the area, rather than soak up demand, Wedbush's Hardiman says. "The hope is it won't be a negative to the competitors in Southern California," a region Disney, Six Flags, Cedar Fair and SeaWorld all have parks. "We'll have to see."

Despite the challenges, analysts are bullish on all the theme park operators' stocks calling for upside over the next 18 months of anywhere from 8% for Six Flags to 14% for Cedar Fair. "We like the business model, we like the stability of the business and you get a dividend," says Wells Fargo's Conder.

Follow Matt Krantz on Twitter @mattkrantz

AMUSEMENT PARK OPERATORS' STOCKS

Company, symbol, YTD %, 12 mo. %, upside to targets, rating

Six Flags, SIX, 5.6%, 21.5%, 7.9%, outperform

Cedar Fair, FUN, 4.2%, 0.3%, 14%, outperform

Walt Disney, DIS, -4.3%, -7.9%, 11.1%, outperform

SeaWorld, SEAS, -9.5%, -17%, 9.2%, hold

Source: S&P Global Market Intelligence, USA TODAY

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