Will Chuck E. Cheese Celebrate The Record Number Of Births In 2007 With Record Profits?

| About: Apollo Global (APO)

When people think of record American births, they might envision baby-boomers sliding in the mud at Woodstock, but the annual record number of births was not during that era. As reported by CNN, there was a record 4.3 million babies born in 2007, and this number began to decline to an estimated 4.0 million newborns by 2010. The CNN story also provides an informative chart suggesting a positive correlation between birthrates and the strength of the economy, meaning birthrates are lower during recessions. The United States Census web site provides details of all of the children born in the U.S. from 1960 to 2008 here, and the Centers for Disease Control and prevention provides 2009 births, and confirms preliminary 2010 numbers here. I've summarized the results in the table below.



























What does this mean for investors? There are going to be a lot of kids celebrating their fifth birthdays in America this year. The number of children born in 2007 was 7.3% higher than just five years prior to that in 2002. Based on the year-over-year increases in births from 2003 through 2007, one might also expect more kids turning ages 6 through 9 in 2012 than last year (obviously there are other factors including immigration determining the number of children in the U.S.)

In the short term, this may be a positive for companies that cater to kids in the 5 to 9 age group. This could be good news for companies in the business of entertaining children, including movie producer Dreamworks Animation (NASDAQ:DWA), a company that I've written about here and here, and Disney (NYSE:DIS), which reported a 10% year over year increase in theme park and resorts revenues on Tuesday.

However, when considering these U.S. birth statistics, DWA and DIS get a significant amount of their revenues outside America, and obviously not every American kid can go to Disneyland. Fortunately for parents, Mickey isn't the only mouse in town. According to information presented at a 2008 conference by Chuck E. Cheese's parent company CEC Entertainment (CEC), Chuck E. Cheese surpassed Mickey Mouse in popularity among 6 to 8 year olds in 2000, based on surveys conducted from 1994 to 2006.

Chuck E. Cheese's restaurants feature animatronic characters, games, pizza, and most importantly are places parents can throw birthday parties without worrying about kid party-goers potentially destroying their homes. It has 556 locations, of which 507 are located in the United States and Canada, and company-owned and operated according to its most recent quarterly report, for CEC's third quarter ended October 2, 2011. The company announced yesterday that it will host a conference call to discuss its fourth quarter and year end results on Thursday, February 23, 2012.

In its 2010 letter to shareholders, which can be downloaded here, the company boasted a 13% increase in birthday party sales, helped in part by its Ticket Blaster, which, in game show fashion blasts tickets redeemable for something presumably fun at the birthday boy or girl in a windy booth.

CEC estimated in its third quarter report same store sales for fiscal 2012 of flat to positive two percent. CEC also announced that share buybacks contributed to increased earnings per share for that quarter, and a chart available on its Investor Relations web page indicates that shares outstanding significantly declined every fiscal year since the year ending December 31, 2006. CEC has a trailing dividend yield of 2.36%, and has a trailing p/e ratio of 13.34, as of the time of this article, based on the numbers provided on the company IR site. On the negative side, long term debt more than doubled since the end of 2006, however the company's debt has declined since its 5 year peak at the end of 2008. So investors who believe that the worst is behind the U.S. economy may want to look closer at CEC as a potential way to capitalize on new five year olds running through the restaurants' doors.

However, as can be seen from the birth chart, one might expect in the longer term, depending on economic conditions, demand from the 5 to 9 age group could decline as the number of kids born in 2010 is 7.3% lower than in 2007. For companies like Disney and DWA that don't just cater to children within a narrow age group, this may not be an issue, but for a company like CEC, this may impact its revenues, unless better economic conditions within America or sales outside America can help a declining number of children within their mouse-mascot-fan demographic.

Disclosure: I am long DWA.

Disclaimer: The commentary expressed in this article is not legal advice, nor investment advice, and is subject to Seeking Alpha's Terms of Use, which are available here: seekingalpha.com/page/terms-of-use

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