Cedar Fair Keeps Delivering On Promises

| About: Cedar Fair, (FUN)
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I first recommended Cedar Fair LP (NYSE:FUN) in a June article because of its projected yield of more than 5% for 2011 and plans to double the cash distribution to unit holders from $1 this year to $2 in 2013. I found this to be extremely attractive in a low interest rate environment. Before proceeding further, it is perhaps useful to explain a few things about this particular investment.

Briefly, Cedar Fair is a limited partnership (LP) that owns and operates nearly a dozen amusement parks with several in Ohio and California. They include Knotts Berry Farm, located not far from Disneyland; Dorney Park in Eastern Pennsylvania; and others in Canada, Virginia, Minnesota and elsewhere. It also owns five hotels and several water parks. Almost all of these parks are seasonal, with Knotts Berry Farm the only one open year round. As an LP, Cedar Fair pays a "distribution" rather than a dividend and reports earnings on a Form K1 rather than a 1099-DIV.

Last June, some had concerns about the amount of the distribution because the quarterly payouts were going to be $0.08, $0.10, $0.12 and $0.70 over the 4 quarters. One had to have some faith in management, the ability of the partnership to pry discretionary dollars from potential consumers in a tough economic environment and relatively favorable weather conditions in order to count on that $0.70 in the fourth quarter. On Thursday, November 3rd, management and the board delivered. As part of the earnings announcement,

"The Company's Board of Directors has declared a cash distribution of $0.70 per LP unit, payable on December 15, 2011," said Ouimet. "With this fourth-quarter distribution, we will have satisfied our previously announced intention to pay $1.00 in distributions to unitholders in 2011.

So far so good, but there was a lot more good news. As I noted earlier, this is a highly seasonal business. The summer season "ends" with the traditional Labor Day weekend and family attendance drops off as kids go back to school and the third quarter is the peak in attendance, revenue and profit. Here are some of additional highlights of the third quarter report:

  • Net Revenue up $27.3 million to a record $572.3 or a 5% from Q3 2010
  • Attendance up 276,000 or 2%
  • Average spending by attendees grew both within the confines of the parks as well as outside the parks
  • Net income was $152.7 million, or $2.74 per diluted unit, up from $75.7 million, or $1.36 per diluted unit

In addition, FUN has been able to stretch the season into October with Halloween themed events. During the conference call the company disclosed that October was also a record month, surpassing the previous record set just last year, and as a result, increased full year guidance.

In October, attendance was up approximately 6% or 155,000 visits and average in-park guest per-capita spending increased approximately 4% or $1.39. ...

This combined with a more than 10% increase in out-of-part revenues produced in $11 million or a 10% increase in revenues for the month. Based on our record setting results through October and our continued optimism for the balance of 2011, we are increasing our guidance for the year as we now expect to achieve net revenues are between $1.015 billion and $1.025 billion and adjusted EBITDA of between $365 million and $375 million.

In addition, during the Q&A of the CC it was disclosed that the comparables for November-December - essentially the performance at Knotts - would be easy to beat since 2010 had been hampered by a rainy December.

On a going forward basis, FUN will continue to spend capital while investing in new rides. 2012 will require some extra use of cash as the parks need improvements to satisfy new requirements under the Americans with Disabilities Act, and the company will be using $50 million to settle cross currency swaps. In spite of that, incoming CEO, Matt Ouimet, reiterated future distribution plans:

The 2011 operating performance puts us on pace for a significant increase to the distribution in 2012 and for $2 or more in 2013 while at the same time reducing our debt and investing in our core business.

During the Q&A session Brian Witherow – VP and Corporate Controller - responding to a question about the use of cash and the distribution elaborated:

...being able to continue to pay an ever increasing distribution that grows as our operating results grow and is sustainable even in down years is part of the objectives the board has laid out for our cash. That being said, we are in very good shape to do what we committed to in terms of our distribution for next year but we have talked about a range of $1.35 to $1.65. And based upon the results we see this year, I think the expectation can be that we will be on the high end of that range.

FUN has reduced its Consolidated Leverage Ratio to 4.3 from 4.5 in the year ago period and even at that reduced level, or its target levels of 4x for total debt and 3x for FUN's senior secured debt, some might find this investment too risky. For me, the allure of a yield that was targeted at more than 5% was sufficient for me to take some risk. Now, with the Unit Price over $21 at Friday's close, the projected yield is still attractive on a going forward basis; more than 7% in 2012 and just under 10% in 2013.

These parks require potential visitors to get in their cars and drive, in some cases for hours. FUN accomplished record results in an environment with high fuel prices and despite a weak economy. FUN has proven to be remarkably resilient in attracting visitors and getting them to part with more of their discretionary dollars. Are you as an investor willing to part with some of your hard-earned dollars to invest in FUN?

Disclosure: I am long FUN.