By now most investors know that Cedar Fair, LP (FUN) is on its way to a very good year. The company already announced that as of September 5th, the year-to-date revenues were 5% ahead of last year's record pace. Since that period represents more than 80% of the company's projected revenues, only a difficult Halloween season is likely to prevent another record year. So, what is the tie-in to agritourism?
Agritourism competes for a piece of the family entertainment budget. In a recent article by Rick Callahan, he wrote:
For many farms and orchards, autumn is the peak agritourism season as families seek out a taste of rural life with outings to explore corn mazes, take hay rides and pick their own apples or pumpkins. Tourism generated about $566 million for more than 23,000 U.S. farms in 2007, according to the U.S. Department of Agriculture's most recent agriculture census - a survey conducted every five years.
Callahan also noted that late frosts in the spring decimated apple orchards in some areas of the country and the drought affected the ability of other farmers to grow corn tall enough to construct a maze.
The Cedar Fair Alternative
Families that had been planning on a fall outing consisting of hayrides, walking through corn mazes or picking apples and pumpkins may opt for a Halloween Haunt event at one of Cedar Fair's amusement parks. Whether it's at Dorney Park in Pennsylvania, Kings Island near Cincinnati, or at one of Cedar Fair's California parks, the company has successfully been extending the season and increasing revenues beyond Labor Day.
Will the weather related issues that hurt agritourism result in a significant bump in ticket sales? Probably not; the weather will be much more of an issue. But once the parks are open and staffed, incremental revenues drop to the bottom line. And at admission prices that range from $26 to $58, with less than 56 million units outstanding, it doesn't take much to have a noticeable effect on that bottom line.
It should also be pointed out that the same pre-payment and season pass plans that helped Cedar Fair achieve the increases in attendance and revenue through Labor Day have been carried over into the Fall. A quick visit to individual park web sites shows Fast Pass premium plans, pre-payment discounts, monthly payment plans, family discounts and Fall season passes are all being offered for the Halloween season.
Cedar Fair has had an erratic distribution payout the past 5 years. It is projecting a $1.60 distribution for 2012, up from $1 in 2011, $0.25 in 2010, and $1.23 in 2009. It is also projecting more than $2.00 for 2013, a record rate comparable to the $1.915 paid in 2008. The 2012 yield based on the current unit price of $34 is 4.7% and the projection for 2013 is more than 5.9%.
When I first wrote about Cedar Fair just over 16 months ago, the units were trading under $20 and the projections for 2013 had been announced. At that time, a future yield of more than 10% was something to get excited about. Today, because the unit price has risen to $34, that 2013 payout of "more than $2" would be a yield of only 5.9%. While still attractive in today's low interest rate environment, it has become more difficult to be enthusiastic about its prospects. As recently as June when the units were at $25.55, I wrote, "Those able to accept the risks of this discretionary business and its high debt should be amply rewarded." Those risks include its high debt leverage and the weather.
Weather has always factored into Cedar Fair's business. It's hard to get people to get in their cars and drive long distances to outdoor theme parks when it's raining or too hot (or too cold if it's one of their water parks), but over a period of several months, the regular season weather patterns tend to even out.
The weather is much more of a factor during the Fall season. It is a short season and limited to the weekends for almost all of Cedar Fair's parks. Good weather from late September through Halloween will be more important than the possible positive spillover effect from agritourism losses, but where so much of any incremental revenue will drop to the bottom line, every little bit helps.
Disclosure: I am long FUN.
Additional disclosure: I am currently constructing an income portfolio with funds received from a lump sum distribution. I may add to my position in FUN by using a covered call strategy at any time. I may also sell $35 March 2013 covered calls against my current position at any time.