Cedar Fair: Results Less Thrilling Than Attractions

| About: Cedar Fair, (FUN)

Amusement park operator Cedar Fair, LP (NYSE:FUN) reported fourth quarter and full year earnings earlier this week that were less thrilling than its famous roller coasters. As expected, attendance in the fourth quarter declined from the prior year and prevented the partnership from achieving another record year. In a previous article, I wrote:

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.

Cedar Fair CFO Brian Witherow reported "a modest decline in attendance of approximately 86,000 visits" for 2012. Although overall attendance was down, new attractions can drive increases at particular parks. This was the case at Canada's Wonderland which experienced the largest increase of any of the company's parks. This was not too surprising, since one of Cedar Fair's larger investments in 2012 was in Wonderland's "Leviathan, a 306 foot tall, 92 miles per hour steel coaster which is one of the tallest and fastest coasters in the world."

Despite the overall decline in attendance, the company set records for revenue (up 3.9% over last year's record) and adjusted EBITDA, and both were in line with the company's most recent guidance. The record revenue was driven by increased sales of season passes and new premium services which contributed to a 4.3% increase in spending per attendee.

There were other positives as well. The company modestly reduced debt and decreased its leverage from 4.2x to 3.9x. It is also trying to improve its debt structure and recently filed an 8k that states:

On February 20, 2013, Cedar Fair Entertainment Corporation (the "Company") announced that it is seeking to refinance its existing $1.131 billion term loan due 2017 to, among other things, ((NYSE:I)) reduce borrowing costs and (II) extend the tenor of its capital structure. The Company expects the financing to include $630 million of term B debt along with senior unsecured debt.

The company will also continue to keep its parks relevant by investing in new attractions for the forthcoming season, including a new $20 million coaster at its flagship park.

The Distribution

The main reason Cedar Fair has been part of my portfolio is the distribution. Last year it was $1.60 per unit, and at the current price near $38, the yield is just over 4.2%. While that may not seem overly attractive, when 2012 began the unit price was $21.50 and the anticipated yield was more than 7.4%.

During the conference call CEO Matt Ouimet said:

As we announced on our third quarter call, with the strength of these results and our confidence heading into 2013, our Board of Directors expect to pay a record $2.50 per unit distribution to unitholders in 2013. The first quarter distribution of 62.5 cents is expected to be declared in the near future and is expected to be paid on March 25 to unitholders of record on March 15.

The 2013 distribution of $2.50 would put the forward yield at 6.6%. Many investors are already aware of the amount of the new distribution, although since it has not yet been declared, financial web sites will not currently be showing this amount and it will not yet appear as 6.6% on lists designed to screen for dividends.

This is not the first time that Cedar Fair's distribution caused anomalies on financial sites. In 2011 the annual distribution was projected to be $1, but it was to be back-end loaded with the December distribution at $0.70. When the December distribution was declared, the sites annualized the amount to $2.80 (and showed a yield of more than 12%), even though the 2012 distribution had been projected at $1.60.

The Risk

Ouimet often talks about the "staycation" becoming the norm. He is referring to families that will prefer to forego the travel required for traditional vacations in favor of day trips to one of the company's many water or amusement parks. Initially sparked by budget constraints during the recession, the view is that families have found this low cost alternative less of a hassle and more enjoyable.

Still, Cedar Fair is a highly discretionary expense. Many families have seen the payroll tax hike take a bite out of their family budgets, especially that portion devoted to entertainment. Cedar Fair may have avoided part of the impact by implementing a monthly payment plan in October that permitted families to pay for passes in six monthly installments.

The payment plan has another advantage. When families have already paid for their passes, poor weather is less likely to be a consideration when starting out on an all-day trip.


Cedar Fair is not an investment for everyone. It has a significant amount of debt, is dependent on a highly discretionary expenditure and is subject to weather related risks. It is also a modestly more complicated investment because it is a Limited Partnership, pays a distribution instead of a dividend, and reports information on a K-1 rather than an IRS Form 1099-DIV. Even in an IRA, these distributions must be tracked, and in some cases, reported.

With Ouimet and his team making consistent improvements, I find those complexities and risks acceptable, especially when I balance them against that expected distribution of $2.50 and a yield of more than 6.6%.

Disclosure: I am long FUN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have sold $40 calls against a portion of my position to enhance overall return.

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