Wide Moat Business Type Series: Theme Park Operators

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Includes: EUDSF, FUN, SEAS, SIX
by: The Value Pendulum

Summary

I have chosen theme park operators as the third wide moat business type in my series of articles on the topic.

Theme park operators are attractive businesses, because of high barriers to entry, strong pricing power and prodigious free cash flow generation.

Eight of the 13 listed theme park operators I found are listed in Asia, while the remaining five are U.S. and European stocks.

This is the third article in my series of articles on wide moat business types; I wrote about airports and elevator manufacturers here and here previously. Theme park operators are the focus of today's article. I will extend the definition of theme parks to include any tourism infrastructure asset, including aquariums and zoos.

The Wide Moat Of Theme Park Operators

A theme park operator's moat is protected by significant entry barriers. Firstly, the construction of a new theme park requires a lot of capital, roughly around $300 million. Secondly, the payback period is long, approvals will take a couple of years prior to actual construction. Lastly, even if one has the capital and is willingly to be patient, there are limited sites available to build new tourist attractions or theme parks, particularly in "hot" tourism markets.

Theme park operators also have tremendous pricing power, with ticket price increases being a growth driver for most of them. As a parent, will you reject your child's request for visit to a theme park, just because the operator raised ticket prices?

Also, theme parks are less likely to be disrupted by new technologies or evolving consumer trends. Theme parks provide entertainment and education experiences consumed by visitors in person, implying that there are no perfect substitutes.

Theme parks boast very attractive financial characteristics. They tend to be free cash flow generative with minimal working capital needs pertaining to either receivables or inventories. Operating leverage is at play here as well, with revenues from additional vistors beyond the break-even point flowing directly to the bottom line.

Analyzing Theme Park Operators As Wide Moat Investment Candidates

An investment checklist for theme park operators could potentially include the following questions:

  • How "prime" is the location of the theme park? Is the city a tourist hot spot?
  • Are there any competing tourist attractions in the vicinity? What is the theme park's value proposition and differentiating factors vis-a-vis competitors?
  • If there are more than a single tourism attraction/theme park in the market, how has the competitive dynamics been in the past? Is there aggressive competition among the different players based on price? Is the "pie" sufficiently large to share among the competing theme parks?
  • Compare the amount of money that the theme park operator spends on advertising & promotion, with the historical ticket price hikes to assess if the company boasts pricing power in excess of any costs or investments to maintain the brand equity.
  • What is the probability of a new tourist attraction/theme park being built in the near future? Is the theme park's surrounding area highly developed, which will lower the probability of new competitors popping up in the foreseeable future?
  • Is the theme park dependent on any specific theme or asset? for example, SeaWorld (NYSE:SEAS), the largest aquarium operator globally, has been under pressure from animal rights advocates, due to its killer whale shows. Another example will be a theme park whose fortunes are tied to the popularity of a specific movie or cartoon character.
  • Is the theme park operator currently embarking on an ambitious theme park development cycle, which will elevate capital expenditures in the near term?

Seeking Listed Theme Park Operators Globally

In my search for theme park operators listed around the world, I found 13 of these companies, of which five of them are U.S.- and European-listed stocks, and eight of them listed in Asia.

Please find below a quantitative snapshot of the five theme park operators listed in U.S. & Europe, based on data accurate as of February 5, 2016:

Stock Exchange P/E P/B EV/EBIT EV/EBITDA EBITDA Margin EBIT Margin Net Margin Gross Profit/Total Assets ROA ROIC*
SeaWorld Entertainment NYSE 43.44 2.79 19.66 6.61 25.3% 12.5% 4.2% 26.6% 1.4% 9.9%
Cedar Fair (NYSE:FUN) NYSE 23.35 22.49 12.94 9.33 35.5% 24.8% 12.0% 52.2% 5.7% 23.2%
Euro Disney SCA (OTCPK:EUDSF) (EPA:EDL) Euronext Paris n/a 1.71 -33.30 13.24 10.3% -4.1% -7.4% 7.6% -4.6% -4.0%
Tivoli A/S (CPH:TIV) Copenhagen Stock Exchange 39.21 2.87 30.19 13.40 16.9% 7.1% 5.2% 83.5% 5.1% 9.5%
Six Flags Entertainment (NYSE:SIX) NYSE 38.23 27.50 19.78 14.75 28.7% 19.5% 10.0% 42.8% 5.7% 25.8%
Click to enlarge

*ROIC was calculated using the following formula: Trailing 12 months EBIT / (Current Assets - Cash and Cash Equivalents - Current Liabilities + PPE)

As a special bonus for my subscribers, they will get access to the names and profiles of these nine (9) Asian-listed theme park operators in a separate bonus watchlist article.

Note: Subscribers to my Asia/U.S. Deep-Value Wide-Moat Stocks exclusive research service get full access to the list of wide moat investment candidates and value traps, which include "Magic Formula" stocks, wide moat compounders, hidden champions and high quality businesses, that I have profiled.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.