Cedar Fair: Growth Opportunities in Amusements

Cedar Fair (FUN) is a publicly traded partnership headquartered in Sandusky, Ohio, and one of the largest regional amusement-resort operators in the world.

The Partnership owns and operates 11 amusement parks, six outdoor water parks, one indoor water park and five hotels. Amusement parks in the company’s northern region include two in Ohio: Cedar Point, consistently voted “Best Amusement Park in the World” in Amusement Today polls, and Kings Island; as well as Canada’s Wonderland, near Toronto; Dorney Park, PA; Valleyfair, MN; and Michigan’s Adventure, MI. In the southern region are Kings Dominion, VA; Carowinds, NC; and Worlds of Fun, MO. Western parks in California include: Knott’s Berry Farm; Great America; and Gilroy Gardens Family Theme Park, which is managed under contract.

The L.P. Units trade on the NYSE under the symbol FUN and closed Wednesday at $7.37.

They took a big hit right after the (reasonably good) third quarter earnings release simply due to a change in income distribution policy. FUN had been mainly seen as an income vehicle for its holders having paid generous distributions of $1.40 - $1.92 annually in each calendar year from 1999 through 2008.

With the recession hurting operating earnings and the very tight credit markets, management announced a suspension of distributions starting in 2010 in order to pay down debt. This seems like the proper long-term strategy even though the old income-seeking holders dumped the stock on the news.

FUN units briefly went under $7 before rebounding a bit to finish on Nov. 4th at $7.37. The 52-week range has been $5.75 - $19.80. Until late 2008’s market meltdown, the low from 1998 had never been less than $17.40 and the yearly highs had ranged from $20.90 to $36.00.

Ignoring the change in distribution policy, what are these units worth on fundamentals?

The business is seasonal with more than 100% of the profits generated in the spring-summer months. The nine-month results were $1.92 in 2009 versus $1.65 in the prior year’s same period. The Zacks estimates for the full years 2009 - 2010 are now running $1.16 and $1.36. That puts the multiples at < 6.4x this year’s and about 5.4x the 2010 expectation. Compare those with 10-year median P/E of 16x to see just how cheap FUN is right now.

Here are the per unit numbers for Cedar Fair as reported by Value Line:

Year	Sales	C/F	EPS	Dist.	Avg. P/E	Range
2001	9.45	2.22	1.36	1.58	15.5x	17.80-25.00
2002	9.95	2.24	1.39	1.65	16.7x	19.60-24.80
2003	10.06	2.58	1.67	1.74	16.0x	22.70-31.50
2004	10.13	2.41	1.47	1.79	21.4x	28.70-36.00
2005	10.57	2.68	1.61	1.83	19.0x	25.70-34.00
2006	15.37	3.29	1.59	1.87	17.2x	24.10-29.90
2007	18.19	3.20	0.79	1.90	33.9x	20.60-30.70
2008	18.09	3.62	1.34	1.92	18.9x	11.30-25.00

Cedar Fair remains quite profitable and management’s decision to suspend the distributions to reduce debt seems quite sound. It what almost every bank and S&L in America should have done (but didn’t) over the past few years.

A return to even 12 times 2010’s projected earnings of $1.36 would lead to a price point of $16.32 /unit or up 121% from yesterday’s closing quote. Somewhere in the future it is expected that the distributions will be reinstated as well.

This looks like an opportune time for investors to accumulate FUN for capital gains potential by buying from those downhearted income investors currently exiting these units.

Disclosure: Author has been a big buyer of FUN units over the past few days. I am now long FUN and short FUN puts.

Comments

[mbkelly75:]

On 13 Oct - their Moving Averages formed a Death Cross showing they are trending down - not a good time to buy. They have no earnings - their profit margin is -1.17% and their P/B Ratio = 8.60 - also not good. The Quick Ratio is terrible at 0.56 (>1 is what I look for) and the debt - long-term and short-term is huge. They have enough cash/share to pay the dividend this quarter anyway ($0.58/share), but this does not make me feel better. On the good side, P/S is only 0.41 (<1 is good), and the P/FCF is 12.33 (<15 is good) so they may actually be undervalued at this price. When they finish tanking down and actually start trending up again (as shown by a Golden Cross) - they just might be a buy - but I never buy anything that is trending down.

Nov 05 06:28 PM

[Paul Price:]

CEDAR FAIR
SUMMARY STATEMENTS OF OPERATIONS
THIRD QUARTER


(In thousands Three Months Nine Months
except Ended ..... Ended
per unit) 9/27/2009 ............ 9/28/2008
Net income -
diluted $1.92 $1.65 .... $1.10 $1.12

Nov 05 06:56 PM

[robert99:]

"The business is seasonal with more than 100% of the profits generated in the spring-summer months."

More than 100%?

I did some research on FUN, and I like the company, but that's a lot of debt.

Nov 05 08:57 PM

[Paul Price:]

More than 100% of yearly profits.
The off-season posts losses.

Sorry for any confusion.

Nov 06 12:24 AM

[Jim Swick:]

It was a dumb move buying the Paramount parks and taking on a mountain of debt. The whole operation has gone to hell since.
Jim S.

Nov 06 05:24 PM

[Anthony Davian:]

The author deleted my last post but I agree with you. Next stop is Chapter 11 if they want any hope of staying afloat. Would love to hear the strike and month puts the author has claimed to have sold. He is probably almost 100% of the open interest if this is true, which I don't believe because the market is so thin there is simply no reason to be trading in there.

Nov 10 09:15 PM

[FreeMkts:]

Should be able to pay down 100M to 200M per year of debt after suspending the dividend. Enterprise Value of 2.1B of which 400M is equity. Two years of debt reduction should translate to doubling the equity value. That is if the economy stays in the toilet.

Pay off half the debt over five years before reinstating the dividend. If enterprise value stays the same, stock holders get 3X appreciation. With half the interest expense they could pay out $2 dividend easily.

How do you knuckleheads think LBOs work? Same thing here without the buy out.

Nov 16 11:50 AM

[A. Chi:]

The covenants are more of a danger than the cash flow. They will violate the consolidated leverage ratio this year so their cash flow will probably be redirected to the lenders for the next few years.

Nov 18 08:34 AM

[FreeMkts:]

A. Chi
And with plenty of cash flow to pay down debt, they will be A-OK. Lenders are not going to force bankruptcy when they can see plenty light at the end of the tunnel. In time every one gets paid handsomely.

Nov 19 12:28 PM