Cedar Fair LP (NYSE:FUN), a publicly traded partnership headquartered in Sandusky, Ohio, is one of the largest regional amusement-resort operators in the world. The partnership owns and operates 11 amusement parks, four outdoor water parks, one indoor water park and five hotels. It's about to begin its summer season and should produce a record year in terms of attendance, revenue and profits.
The competitive landscape within which Cedar Fair operates is more about prying discretionary dollars from consumers than competing head to head with other theme parks. One notable exception is Knott's Berry Farm in a crowded Southern California family entertainment market. Knott's is less than 10 miles from Disney's (NYSE:DIS) Disneyland theme park in Anaheim, about 30 miles from Universal Studios (part of NBCUniversal, in turn owned by Comcast (CMCSA) (CMCSK)) in Hollywood and less than about 100 miles from Sea World. (Speaking strictly as a tourist to the area, I made sure to visit all four destinations after making the cross-country trip to visit relatives.)
Another exception is Cedar Fair's Dorney Park in Allentown, PA. Located "near" Dorney Park are Hershey Park in Hershey, PA, Sesame Place in Langhorne, PA, and Six Flags (NYSE:SIX) Great Adventure in Jackson, NJ. All draw on overlapping geographic territories, although the demographic targets are somewhat different.
Six Flags is more of what an investor would consider a traditional competitor. Not only is it more of a pure theme park operator, but also because several of its locations draw from the same geographic areas where Cedar Fair operates. In addition to the overlap in the NJ-PA area, both companies have parks in the San Francisco area, and Six Flags also operates a water park in Southern California.
Despite some of these overlaps, most of Cedar Fair's parks are not competing with other parks. Instead, they are competing for the family entertainment dollar. And, according to CEO Matt Ouimet, it is offering an alternative to the traditional vacation budget dollar. Discussing the "staycation" alternative at the JPMorgan Global Technology, Media and Telecom Conference last month, Ouimet said:
I was originally little suspicious of the term Staycation, you kind of hear these new buzz words, but I will tell you that phenomenon clearly played out through the economy as we think about it - it was an economic disincentive to take a longer trip. You either didn't have overtime, which in the middle-class America is a very important device for the extras if you will, or you didn't feel secure about your jobs so people stayed closer to home and it's certainly must have played out in the Regional Amusement Park business because everybody had record years.
I think what we're seeing, though, is Staycations are going to migrate to what we're calling Funcations which is during this time period we re-trained America that road trips were fun and it was a lot (easier) than going through an airport with bunch of kids. ... So, I think what you are going to see is that actually the ritual visit for the two or three hour four hour drive to Regional Amusement Part will survive very well as the economy recovers. I don't think we will lose people because of that and will actually pick up those people who we have lost because of the economic situation as the economy improves.
And it's not just the economic uncertainty and the airport hassles that are altering the traditional one or two week family vacation. Ouimet points to the overcommitted families, or ones facing "time poverty," driving a shift in priorities. He noted:
...when I played little league I played six or eight games and then we were done and we went on a family vacation.
If you have a son or daughter who plays sports these days I suspect they are in the traveling team and they are ending up in Gatlinburg Tennessee and you know the drill, right?
This change increases the appeal of day trips to Cedar Fair's parks, and if multiple trips are anticipated, families are more willing to buy season passes. To help the affordability of season passes (as well as single day passes), Cedar Fair had recently introduced installment payment plans.
All of these factors have helped Cedar Fair effectively compete for a greater portion of the family entertainment budget.
The First Quarter
It would be dangerous to draw too much from first quarter results. Only one of the partnership's parks - Knott's Berry Farm - is open year round. However, revenue for the first quarter was up nearly 50%. That revenue was $41.8 million, up $13.6 million from $28.2 million in the year earlier Q1. Fiscal year reporting and the timing of the Easter holiday and Spring Break accounted for part of the growth, although the company pointed out that normalizing for those events still resulted in strong gains:
Looking at results for the end of April for a moment, which evens out the calendar shift associated with the earlier timing of Easter and Spring Break, net revenues remain strong, up $12.5 million on the continued solid momentum in both attendance and guest spending.
And it wasn't just the recorded revenues that were showing gains. The deferred revenues associated with installment sales, season passes and hotel bookings showed a significant gain over 2012. It ended the quarter at $66.2 million compared to $50.8 million one year ago, an increase of 30%. This bodes well for future revenue and attendance.
What lies ahead?
The first quarter press release was titled Cedar Fair Announces 2013 First-Quarter Results - Anticipates Record-Setting Performance In 2013. Based on first quarter results, another record year would seem to be a reasonable expectation. The April results showed that the company was still ahead, and this was even further reinforced when Ouimet talked about the company's opening at its oldest, largest and most profitable park - Cedar Point.
...last weekend (in early May) was the opening weekend for Cedar Point and we had the most successful opening we've had in the 144-year history.
Much of this can be traced to Cedar Fair's significant investment - about $30 million - in Cedar Point. Refreshing attractions is a key driver that keeps customers returning. And most of that investment went into building a new roller coaster.
With Cedar Fair, it's been much more than simply building new attractions. The company has made some significant changes over the past few years. In addition to introducing prepayments and installment sales, the company also introduced FastLane and FastLane+, a modification of the a program used at Disneyland. As anyone that has ever been to a crowded theme park knows, inordinate amounts of time can be spent waiting in line. Disneyland (with much higher ticket prices than Cedar Fair) allows customers to go to a shorter line using FastPass on some of their most popular rides. These can be used up to three times to circumvent the lines. With Cedar Fair, FastLane and FastLane+ also allow users to circumvent the lines, although these are sold as premium add-ons. And, they are quite expensive add-ons, averaging around $50 per person.
Other initiatives included introduction of a CRM system that has now been rolled out to all Cedar Fair parks. The system allows for dynamic pricing, and provides opportunities to get customers to pre-pay for extras. The idea is to extract as much money ahead of time so that dad feels he is spending a bit less while at the park. Another new program includes RFID (radio frequency identification) bracelets.
These bracelets are used to combat a major problem at some of Cedar Fair's water parks. Customers won't be spending money walking around in a bathing suit while their wallets are back in their lockers. RFID bracelets can be loaded with cash right at the park entrance, so wallets are no longer necessary and the older kids now know exactly what their budget for the day will be. In addition, there are a couple of other added benefits. These bracelets can become status symbols and marketing tools for kids to show off to their friends, and if there's money left over, there is an additional incentive to make a return visit to the park.
The company carries a substantial amount of debt - approximately $1.6 billion - and its leverage ratio is just under 4x. The debt is comprised of four components:
- $630 million Term B at LIBOR + 250 bps (75 bps floor), maturing in 2020 (this loan is fixed through interest rate swaps which terminate in December 2015)
- $500 million Senior Unsecured Notes at 5.250%, maturing in 2021
- $405 million Senior Unsecured Notes at 9.125%, maturing in 2018 (not "affordably callable" until August 2014)
- $255 million revolver at LIBOR + 225 bps, maturing in 2018
Other than the $405 million of 9.125% debt, the above issues were part of a significant restructuring that took place in the second quarter. The company typically draws on the revolver to finance projects during the off-season and then pays it down as the cash rolls in during the summer. As of the end of the first quarter, $96 million had been drawn on the revolver.
Ouimet has been with the company for less than two years and CEO since January of 2012. During that time the annual distribution (as a partnership, Cedar Fair pays a distribution as opposed to a dividend) has been increased from $1.00 in 2011 to $1.60 in 2012 and is currently at a $0.625 quarterly rate with an expected payout of $2.50 for 2013. At $2.50 and Monday's closing price of $41.22, the distribution yields 6.1%.
That's a substantial yield compared to other investment opportunities in the current low interest rate environment. Obviously, the 55%-60% growth in the dividend the past two years should not be expected to continue. Ouimet stated:
...Now what we've said about the distribution is we'll continue to have what we call a quality distribution. We've set it at a level that is clearly sustainable. We've also said that we will grow that distribution as EBITDA grows. To the extent that we generate more cash than we need to reinvest in the business then we'll go through the classic analysis of what else to do with the cash. Do we pay down debt? Do we buy back stock? Do we make other investments that we hadn't contemplated? Or, do we increase the distribution?But it's a little different than some of the other situations I've been associated with before. We always bump that up against the distribution. And so instead of going in some linear format, if you will, we tend to bump that up against the distribution. By all indications, if we have a record year again, we will be in good shape from a cash standpoint.
The projected EBITDA growth is expected to be in the 4% range, and that would suggest that the distribution should grow at something less than 5%.
The weather plays an important role in the profitability of Cedar Fair. Typically, over the critical summer season, the weather tends to even out, aided by the geographic dispersion of the company's parks. In addition, the recently implemented CRM system and installment payment programs introduced in the past few years have also helped to overcome some of the weather related issues. If a family has already purchased tickets, inclement weather is less likely to be a deterrent to taking the family on a round trip drive that will take several hours.
However, in an effort to extend the season and increase profitability, the company has added Halloween themed events. In 2012 attendance was running at record rates until poor weather during October caused attendance to lag behind 2011 results. Despite the attendance shortfall, increased per capita spending allowed the company to post a third consecutive year of record revenues and EBITDA.
Although Cedar Fair presents an investment opportunity with an attractive yield, it is clearly not an investment opportunity that is right for everyone - including those looking for high yields. It has a business model that demands continued capital investment to keep customers returning year after year. The risks associated with its floating rate debt structure, level of debt and dependence on reasonable weather may be too great for conservative investors. And its structure as a partnership adds some complexity when filing one's taxes.
I have found these risks and the added complexity to be acceptable and have made Cedar Fair an important component of my income portfolio. I expect that the distribution will continue to grow in line with the EBITDA growth projections, and believe there will be additional opportunities in late 2014 when I anticipate a refinance of the 9.125% debt.
Disclosure: I am long FUN, DIS, CMCSA. 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 written $40 June covered calls against a portion of my FUN position.