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Morgan Stanley is bullish on regional theme parks and believes two names in particular are poised to outperform: Cedar Fair and SeaWorld. The Wall Street firm initiated coverage of the stocks on Thursday with overweight ratings. Its price target of $53 for Cedar Fair implies nearly 27% upside from Wednesday’s close, while its $70 price target for SeaWorld suggests about 30% upside. “We believe US regional theme parks participate in a growing industry that benefits from differentiated assets, high barriers to entry (i.e., low competitive risks), pricing power, and opportunities for operating leverage,” analyst Thomas Yeh wrote in a note to clients. Both Cedar Fair and Sea World have underappreciated pricing power due to their attractive relative value to other entertainment options and the loyalty of growing season pass members, he said. The companies have seen revenues increase 20% to 30% from 2019 to 2022, outpacing the improvement during this time in other consumer-related sectors, he pointed out. That increase in revenue came despite attendance that isn’t yet fully recovered to pre-pandemic levels. FUN YTD mountain Cedar Fair’s year-to-date performance Wage pressure is also subsiding, which supports margin expansion, Yeh noted. Lastly, regional theme park earnings before interest, taxes, depreciation, and amortization multiples are down 15% to 20% compared to pre-Covid levels. In comparison, lodging multiples are down 5% to 10% and gaming/cruise multiples are up 5-10%, he said. In particular, Cedar Fair has well-invested properties and a strong recurring visitor base, which speaks to its underlying pricing power, Yeh wrote. “Margins have underperformed peers on elevated labor wages, but we see the opportunity for better operating leverage ahead, as park revenues continue to scale and expense growth normalizes,” he said. SEAS YTD mountain SeaWorld’s year-to-date performance An overlapping footprint with Disney and Universal and potential tailwinds from returning international visitation should drive attendance and per capita spending growth for SeaWorld, Yeh said. “Concentrated revenue footprint increases scale opportunities as operating cost reduction initiatives continue, while higher capex in ’23E could unlock long-term growth opportunities,” he wrote. While there are concerns about a potential recession, he believes the regional theme parks can weather a downturn. “While not immune to broader economic cycles or a potential slowdown in consumer spending, the regional theme parks have demonstrated resilience with a relatively quick EBITDA recovery in past cycles vs. other consumer subsectors and destination parks, benefiting from a regional customer base and relative affordability,” Yeh said. Cedar Fair is up just over 2% year to date, while SeaWorld is little changed. — CNBC’s Michael Bloom contributed reporting.
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