Since Cedar Fair LP (FUN) reached a 52 week high of $31.74 on April 20th, the unit price has declined nearly 20% to $25.55 on June 1st. The current distribution rate of $0.40 per quarter generates an attractive yield of 6.26%. Is Cedar Fair the right investment for you?
Cedar Fair is a limited partnership (LP) that owns and operates 17 amusement parks with several in Ohio and California. They include Knott's Berry Farm, located not far from Disneyland (DIS), Dorney Park in Eastern Pennsylvania and others in Canada, Virginia, Minnesota and elsewhere. Cedar Fair also owns five hotels and several water parks. As an LP, Cedar Fair pays a "distribution" rather than a dividend and reports earnings on a Form K1 rather than a 1099.
The partnership has a highly seasonal business with all its parks (except Knott's Berry Farm) closed from Halloween through the end of March, and most of its revenue will be generated in the third quarter. Should investors in Cedar Fair be concerned about the weak jobs report issued last week, the continuing concerns over Europe or the slowing growth in China? To an extent, the answer has to be yes, although as I noted in a previous article:
Cedar Fair is in a recession resistant industry. The parks draw on local populations, and when families cut back on expensive vacations, they still find a way to make day trips for a relatively inexpensive family outing.
A quick look at the last several years when the economy was battered by the housing bubble, the collapse of Lehman Bros., the government bailing out the large banks, General Motors, Chrysler and AIG, show Cedar Fair revenues and attendance held up remarkably well.
Cedar Fair Revenue: 2007-2011
Revenue in $Millions
Attendance in Millions
Since the Great Recession, Cedar Fair has brought in a new CEO and introduced new programs to help grow revenue. These programs include:
- Premium priced offerings: Fast Lane (to circumvent long lines), Early Entry and parking fees
- Luminosity and other evening events to encourage visitors to extend the length of their visit
- Dynamic pricing and advanced purchase commitments
Investors may begin to learn about the success of these programs when the company reports Q2 results.
For investors looking for yield, the recent price weakness has created an attractive buying opportunity. And, it's not just the current payout of $1.60 per unit and its yield of more than 6%. Cedar Fair CEO Matt Ouimet stated that the partnership continues "on track for a record distribution of more than $2 per unit in 2013." At $2 per unit, the yield would climb to nearly 8%.
Many will be concerned about the high level of debt and the ongoing need for investments in new thrill rides and attractions. And, with the leverage of about 4.2x, it is understandable. It should also be noted that the partnership recognizes this and has been focusing on reducing the leverage through a combination of paying down debt and increasing earnings.
Those able to accept the risks of this discretionary business and its high debt should be amply rewarded. Cedar Fair was upgraded from Long-term Buy to Buy by Hilliard Lyons last week. It's fairly easy to understand why.
Additional disclosure: I have no positions in any of the other companies named in this article.