* All data are as of the close of Friday, January 23, 2015. Emphasis is on company fundamentals and financial data rather than commentary.
The General Entertainment industry contains companies offering a variety of entertainment services, including cruise lines, ski resorts, theme parks, producers of live music events and touring museum exhibitions, and several online entertainment companies such as vacation planners and producers of video and music entertainment.
Since the two largest U.S.-based companies in the industry offer similar services - theme park amusement - today's competition will pit them against each other to see which is more amusing to investors.
Here's what each offers in the way of services:
• Six Flags Entertainment Corporation (NYSE: SIX), headquartered in Grand Prairie, Texas, owns and operates regional theme and water parks offering thrill rides, water attractions, concerts and shows, restaurants, game venues, and retail outlets at 18 parks - 16 in the U.S., 1 in Mexico City, Mexico, and 1 in Montreal, Canada.
• Cedar Fair, L.P. (NYSE: FUN), headquartered in Sandusky, Ohio, owns and operates 11 amusement parks, 3 outdoor water parks, 1 indoor water park, and 5 hotels - mostly in the U.S., with one park in Toronto, Canada.
The two companies have very simple recipes for success, but very profitable ones at that, with margins ranging from 9% to 25%, and returns ranging from 8% to 59%, enabling them to pay dividends well above the broader market average - currently 4.80% by SIX and 5.60% by FUN.
They have also managed to cause quite a splash on the stock market, with their stocks vastly outperforming both the broader market S&P 500 index and the Consumer Discretionary sector they belong to, as graphed below.
Since June 21st, 2010 (the public debut of SIX), where the S&P 500 [black] has gained 83% and the SPDR Consumer Discretionary Sector ETF (NYSE: XLY) [blue] has gained 120%, FUN [purple] has gained 342% while SIX [beige] has gained 375%.
On an annualized basis, where the S&P has averaged 18.11% and XLY has averaged 26.18%, FUN has averaged 74.62% and SIX has averaged 81.82% per year!
Looking at future earnings growth, the General Entertainment industry as a whole is expected to beat the broader market S&P's earnings with a torrential flow, as tabled below where green indicates outperformance while yellow denotes underperformance.
Over the next two quarters, the industry's earnings are expected to outgrow the market's average earnings at some 7.66 to 21.91 times - even in the dead of winter, thanks to the industry's ski resorts and cruise lines which derive a good deal of business during the winter months.
Over the longer term, the industry is seen outgrowing the S&P's average earnings growth at a more sustainable 2.49 times its rate annually over the next five years.
Zooming-in a little closer, the two largest U.S.-based General Entertainment companies are expected to split perform not at all reminiscent of their stocks' performances to date, as tabled below.
The two companies' earnings growth are projected to flow in opposite directions, with FUN's moving up while SIX's slides down - even evaporating a little over the next two quarters.
The only exception is the next reporting year (2015), where both are seen outpacing the broader market's earnings growth rate, though FUN still outperforms SIX.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the two compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, SIX generated the greater revenue and earnings growth year-over-year, even if only by shrinking its earnings less.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our two contestants, SIX operated with the wider profit margin, while FUN enjoyed the wider operating margin - though both were quite close to each other.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
For their managerial performance, FUN's management team delivered the greater returns on assets and equity by far, though SIX's team still managed commendable results.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the two companies here compared, FUN provides common stock holders with the greater diluted earnings per share gain as a percentage of its current share price, while SIX's DEPS over current stock price is lower, though not by much.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Between our two combatants, where FUN's stock is the cheaper relative to forward earnings and 5-year PEG, SIX's is cheaper relative to company book value.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our two specimens, FUN offers the higher percentages of earnings over current stock price for most time periods, while SIX offers it for the next quarter only.
• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, FUN offers the greater earnings growth in all time periods, while SIX offers not only the lesser growth, but also shrinkage near term.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe SIX's stock offers the greater upside potential and lesser downside risk, while FUN's offers the lesser upside and greater downside.
It must be noted, however, that SIX's stock is already trading below its low target. While this may mean increased potential for a sharp move upward, it may warrant a reassessment of future expectations.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our two contenders, FUN is better recommended with 4 strong buys and 2 buys representing a combined 85.71% of its 7 analysts, with SIX garnering 2 strong buy and 3 buy ratings representing 71.43% of its 7 analysts.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… FUN with a thrilling ride to the finish, outperforming in 20 metrics and underperforming in 11 for a net score of +9, with SIX being no FUN, outperforming in 11 metrics and underperforming in 20 for a net score of -9.
Where the General Entertainment industry is expected to outperform the S&P broader market astronomically this and next quarters, and significantly beyond, the two largest U.S. companies in the space are expected to split perform in earnings growth - with FUN gushing forth earnings growth while SIX contends with earnings leakage.
After taking all company fundamentals into account, Cedar Fair L.P. gushes with the greater financial liquidity given its lower stock price to forward earnings and 5-year PEG, higher cash and revenue over market cap, wider operating margin, greater returns on assets and equity, higher EBITDA over market cap and revenue, greater diluted earnings over current stock price, higher future earnings over current stock price overall, higher future earnings growth throughout, higher dividend yield, and more analyst strong buy recommendations - decisively winning the General Entertainment industry competition.