Earlier this month theme park operator Cedar Fair, LP (FUN) and The Walt Disney Company (DIS) both presented at the UBS Global Media & Communications Conference. Disney certainly seems to fit into a media and communications conference with their television assets that include ESPN, ABC and the Disney Channel or movie businesses that include Pixar, Touchstone Pictures, Marvel Studios, Walt Disney Studios and Walt Disney Animation. Cedar Fair, on the other hand, just didn't seem to belong there.
The Cedar Fair presenter was CEO Matt Ouimet, a 17 year veteran of Disney - all spent on the amusement park side of the business - before joining Cedar Fair. And Cedar Fair, to a small degree competes with Disney, since its Knott's Berry Farm park is fairly close to Disneyland. That wouldn't seem to be enough of a link to become a presenter at this conference, but it was certainly an opportunity to look for some insight into the recent unit price volatility and any hints about fourth quarter results.
When Cedar Fair reported its third quarter results it raised its quarterly distribution from $0.40 to $0.625 per share, and following the announced increase, reached a split adjusted, intra-day, all-time high of $37.69. On a forward basis, the yield would be 6.6%. The market was unimpressed and a week later the unit price had dropped 18% to $30.90 and that yield had increased to 8.1%. Since then the units have recovered somewhat and closed Monday at $32.60.
Cedar Fair's business is highly seasonal, with only Knott's open after Halloween. In recent years the season has been stretched by introducing and expanding Halloween themed events, but by the time the Q3 results are released in early November, the partnership has a fairly accurate idea about where results will come in. The good news is that by many measures, the LP is doing very well. In the Q3 earnings release, Ouimet was quoted:
We experienced another outstanding quarter and are well on our way to delivering record results for the third consecutive year
and, at the conference, said:
And we are - our guidance, which we firmly believe in, is on pace for a third record year here, as we close our books in the next three weeks or so.
So, why are the units still down nearly 9% from that resent high? One reason could be that Cedar Fair offers a highly discretionary product. As the lack of an agreement in Washington on tax policy threatens to tilt the economy back into recession, Cedar Fair's attendance could be hurt, jeopardizing that attractive $2.50 annual distribution. More importantly, Cedar Fair appears to have had a poor Halloween season.
When Q3 results were reported, the company stated:
Comparing both the 2012 and 2011 periods on a 39-week basis, total revenues were up approximately $41 million, or 5%; average in-park guest per capita spending1 increased 4%; attendance increased 1%, or 228,000 visits; and out-of-park revenues were comparable with the prior year.
At the conference, Ouimet stated:
Again, we're on to our third record year here at 12/31 - somewhere between $385 million and $395 million of adjusted EBITDA. Revenues bumping up over $1.055 billion. And then attendance - flat generally is what we're providing in our guidance, at a little over 23 million, which was a record level last year.
The revenue growth was driven by increased per capita spending. This included new initiatives in 2012 like Fast Pass that allows visitors to go to the head of the line and an eCommerce platform that introduced time payment plans. The partnership also increased the sale of season passes and had some price increases.
Weather plays a large role in attendance, and the geographic dispersion of the company's parks and the long season generally evens things out. However, the extension of the season to include Halloween events has increased the risk of bad weather impacting annual financial results and that likely occurred this year.
Poor October weather apparently hurt October attendance and prevented revenue and EBITDA growth from being better. However, this LP provides a hefty payout of 7.7%. Is it sustainable? Ouimet had this to say at the conference:
...that $2.50 has been the focus, not only for the magnitude I said, but the sustainability of it. And we have plenty of cash to pay the $2.50. In that, in our modeling and in many of your models I know, we have reinvestment capital, so we have about 9% capital we reinvest, what we call marketable capital, new rides and attractions. We are assuming that we continue on a discretionary basis, pay down our debt. There's about $20 million or $25 million working through our models relative to that, and there's other variables in there including a little bit of a rainy day fund.
So, I think the investors that own our units to a great degree rely on that $2.50 and the sustainability of it, or the quality of it, as I referenced. The other thing the board has said is that our target is to grow that $2.50 as our business grows. So we would expect to see that as we continue to grow our EBITDA...
As the company continues to grow the distribution, pay down debt and reinvest in new attractions at its parks, it remains a part of my portfolio. Others may find the level of debt, the threat of a recession or the vagaries of the weather make this investment too risky. I find the current price attractive, and may add to my position at any time.