James Hardiman covers leisure stocks for Wedbush Securities. He spoke with Barron’s recently about whether regional theme parks and cruise lines can survive, why he has positive ratings on some of the stocks, and why the long-term outlook for travel remains bright. His edited comments follow.
On the situation now versus the global financial crisis for regional theme parks:
This is the biggest crisis they’ve seen. If you look back at the global financial crisis, it was largely a banking crisis. These companies were probably too highly levered, and when liquidity became scarce, they ran into trouble. Ultimately Six Flags Entertainment (ticker: SIX) went through bankruptcy. Cedar Fair (FUN) had to cut its dividend, but it was able to recover. This is a very different animal. This is the first time that I remember that these companies were shut down for a period of time.
On when the parks might reopen:
I don’t think anybody, including the theme park executives, knows how long they’re going to have to keep their businesses afloat without having the parks open. The outward messaging includes optimism—you know, May time frame [for reopening], maybe June —but I think behind the scenes they’re trying to insulate their businesses to handle a much longer shutdown. I think they’re at least preparing for a scenario in which theme parks don’t open this year. I think that’s seen as more of a worst case scenario, but I think that’s at least on the table right now.
On how theme parks compare:
If you think about destination theme parks, they’re dealing with a double whammy. In addition to people not feeling comfortable being around big crowds right now, a lot of the customers going to a SeaWorld in Orlando, or certainly Disney World or Universal, would need to get on an airplane first. With regard to the regional theme parks, the vast majority of their customers are driving. Cedar Fair, pretty much all of their parks are what I would call regional. I’ve got to think that 90%-plus of the people that come to their parks are driving there.
On solvency for regional theme parks:
The first issue that they’re going to run into is their financial covenants. These are highly levered businesses. When you borrow, there are typically stipulations that you have to maintain. The problem with that is when your parks are shut down, your debt doesn’t change, but your profits go down dramatically. So the first order of business, I think, is going to be renegotiating these covenants. By my math, I think they would run into some issues for Cedar Fair and Six Flags probably by the end of June and for SeaWorld Entertainment (SEAS) probably by the end of July.
I do think their lenders are highly motivated to negotiate at this point. They don’t want to be owners of theme parks.
The second issue would be a liquidity issue. At some point cash becomes a cash issue. Let’s say these parks don’t open in June or July. They’ve still got payroll, maintenance, and upkeep. They’ve got payments on existing debt. They’ve got capital expenditures that they’re contractually obligated to pay. Obviously they’re going to eliminate as much of those costs as they can. But eventually these guys are going to have to take on new debt. I think if they were to secure new debt, interest rates are probably going to be really high.