Cedar Fair: So Much FUN At Cedar Fair, But You Can't Go

Summary

• In March and early April the market was pricing FUN as if it were going bankrupt. In my mind bankruptcy is now off the table due to financing moves made.
• The company has a remarkably recession resistant business which could thrive if air travel continues to be restricted and Americans are forced to stay regional for summer trips.
• COVID-19 has provided the best possible reverse psychology trick imaginable for a successful re opening.

As you likely already know, Cedar Fair (NYSE:FUN) has been on a roller coaster of its own in the last few months, starting February in the mid $50's and cratering all the way down to $13 in mid March due to the COVID-19 pandemic and resulting lock downs only to rise from the ashes to its current $37 print as of 06/05/20

Source: Gary Varvel

In this article I would like to discuss the positioning of Cedar Fair in the leisure industry and the possible effect of the COVID-19 pandemic on future demand.

When COVID-19 first reared its ugly head in the USA during early March, I had the same reaction as most... Leisure companies such as airlines, cruise ships and amusement parks are done for a long, long time! But in late March I started to rethink this stance and refine my thoughts a bit...

1) Airlines- They are in for a world of hurt due to remote work, virtual meetings etc. Not to mention nobody likes being crammed in a tin can at 30,000 ft with 200 strangers to begin with so people will gladly avoid flying if at all feasible. In my opinion, these are un-investable.

2) Cruise Ships- Some will still go sure, but the majority of travelers are smack dab in the worst hit groups of the COVID pandemic of over 50 adults... Plus you are also packed in a metal petri-dish for weeks at a time and most require a flight to reach port... Hard pass.

3) Amusement Parks- If people are not flying and families are not cruising, is everyone just going to sit at home kicking cans around the yard all summer? No, people will choose regional (driving distance) travel with open air attractions. Amusement parks if allowed by local authorities to open could be a huge winner here. So I dug deeper.

Cedar Fair is in a rather envious position in the leisure industry of not only being regional destinations but also so far has not been hurt nearly as much as airlines or cruise companies by the fact that their busy season is just now starting. Very few of Cedar Fairs customers fly in to go to the parks, the VAST majority simply load up their car and drive to stay for the day or two.

Now certainly Cedar Fair has not been unscathed as they do have parks across the country that have lost substantial business from the shutdowns and the company has been burning significant cash during this crisis but not nearly on the scale or breadth as cruise ships or airlines.

For instance Q1 typically results in only 5% of the companies full year revenue... Now to be clear the pandemic will have significant effects in Q2 and beyond, however I think you get my point here. Q3 is the big prize in Amusement parks fiscal calendar... And Q3 is setting up very well.

Pent up demand is building as many Americans are simply sick of staying home and as the weather turns and the sun shines, people want to go out and have fun with their family and friends.

This pent up demand does not mean people will be flying on planes however as the below Harris poll data indicates.

"The survey found that 31 percent are planning to “go on vacation/travel when things return to normal." This is up 7 percent from last week."

"Only 10 percent say they miss traveling on an airplane when asked what they miss the most during this time, and 20 percent say it will take a year or longer for them to fly on a plane once the curve of the pandemic flattens."

Regional (driving distance) travel destinations seem primed to be the main beneficiaries of this pent up demand.

The COVID-19 pandemic may turn out to be the best possible reverse psychology trick ever for the amusement park industry as the more you tell people they cant go, the more they want too!

This crisis reminds me of an episode of South Park that I enjoy titled Cartmanland, episode 6, season 5 where Eric Cartman purchases a struggling amusement park with the sole intention of shutting it down for his own personal use, he then buys TV ads telling people they cannot go and only he is allowed in, only to find that he has created an insatiable demand turning the park into the most successful park in the state.

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In our current crisis, the states have told everyone that they cannot go to Cedar Fairs parks and in the Q1 earnings report, the company stated the following...

"In spite of the disruption caused by COVID-19, the Company’s season pass sales remained up more than 30% as of the end of the first quarter, compared to the prior-year period."

Sound familiar?

I rarely if ever go to amusement parks as I am not a fan of lines or of masses of sweaty humanity, however even I must admit to a feeling of want and nostalgia and would consider taking a couple hours car ride down to Cedar Point this summer. The you can't go technique is even working on me!

And the timing of re-opening is setting up beautifully... On June 5th we received the following news.

"As a result of ongoing discussions with Ohio Gov. Mike DeWine and Lt. Gov. John Husted, we are very pleased to announce that our Ohio parks, including Cedar Point and Kings Island, have been cleared to reopen. We will provide specific opening dates just as soon as we confirm details with the governor. We appreciate the cooperation and support of all those that are working hard to help us and the state of Ohio reopen."

Now I am not predicting a V shaped recovery to the financials as the states will likely put capacity constraints on the parks limiting the ability of a V recovery for Cedar Fair, however the transition to a subscription model of season passes has gained a ton of steam from this pandemic which is a huge positive for the company long term.

In late April the company completed a $1 billion debt offering of secured notes due 2025 which should fund the companies liquidity needs to manage this crisis. The debt is priced at 5.5% which in my opinion is quite a reasonable rate and should not create too much drag on the companies finances as roughly half of the proceeds are to be used to pay down the term loan facility of a roughly equal rate leaving about $27 million in additional interest payments... A fair price to pay for this security blanket.

The company also is looking to utilize this time to massively expand its IT infrastructure and mobile app functions, this is a positive not only for guest safety during re-opening but for the future growth of the business. The actions the company is taking for re-opening are below.

Planning and preparation –

• Guests can make their required reservations online or through the mobile app, reserving a specific day and time to visit the park based upon capacity availability. The guest will receive a time-bound entry voucher, which will automatically appear in the guest’s mobile app when they are logged in.
• Guests who have purchased a season pass will be able to process their passes through the website or mobile app, rather than visiting the pass processing center within the park.
• Park mobile apps and websites will be enhanced with thorough information to prepare guests for changes they will see at the parks.

Arrival and entry –

• Upon arrival, the guest’s reservation will be confirmed and their ticket / season pass scanned.
• All guests entering the parks will be required to complete an initial health check; guests with the park’s mobile app can complete most aspects of the health questionnaire online prior to visiting.
• Targeted messages delivered through the mobile app will remind guests of new processes and procedures; in addition, the app will provide real time alerts regarding any capacity constraints that may affect their visit.

Enjoying the park –

• Enhanced cashless payment methods are being introduced to reduce touchpoints and expenses, as well as improve efficiency and throughput.
• Mobile food ordering is being expanded to at least four parks in 2020 to improve guest service and eliminate long lines at selected food locations.
• The mobile app’s mapping and wayfinding modules, which already allow guests to easily find things like restrooms and phone charging stations, are being leveraged to monitor potential overcrowding in various areas of the park throughout the day; this will help determine where to deploy crowd control measures and enable appropriate social distancing. These modules will also direct guests to the closest hand sanitizing stations.

Exiting the park –

• Enhanced guest surveys will provide the park with firsthand feedback about their visit and the updated protocols and processes for continuous improvement.
• Location services on the mobile app will be able to help manage guest flow and maximize park capacity without sacrificing safety.

Businesses such as amusement parks have been slow to introduce useful mobile apps and IT functions simply because they did not need too, however mobile apps and functions create a stickiness to business and provide additional avenues to monetization which has now been made an obvious priority in the current climate.

Strong businesses and management teams usually find a way to emerge more efficient after a crisis or near death experience and the actions of Cedar Fair's management during this current crisis give me faith that they will emerge as a stronger company on a more solid 21st century foundation then when they went in.

I also want to touch on the remarkable recession resistance of Cedar Fair, this runs contrary to my original thoughts of the company however it does make some sense. As people feel financial strain, they tend to retreat to more local home grown experiences and vacations, instead of 2 weeks in the Bahamas, families take a weekend trip to Knots Berry Farm. They do not stop vacationing or taking trips but again, stay more regional.

Source:

Cedar Fair - Cedar Fair Amusement (FUN) | CedarFair.com

This for me was an unexpected but very positive find in researching the company and is yet another very positive indicator for purchasing units in Cedar Fair.

Now to be clear, I am not predicting smooth sailing for Cedar Fair as even with a successful reopening they will have many added costs in areas such as safety, sanitation, labor costs and capacity restrictions and how that translates to impact financial results may not be fully known until Q3 once many of the parks have been open for at least a full quarter. Also the income side of this investment is firmly on hold until at least December 2021 due to debt convents taken on during this crisis.

I do however think that the company's units are still reasonably attractively priced at $37 for long term investors as the company will likely emerge from this crisis stronger and better positioned for the future. It will take a little time to fully digest the impact of the crisis and as such the price will likely be insanely volatile following any news either positive or negative regarding COVID-19.

I was lucky enough to pick up a few hundred units at $25 in April and will look to add to my position on weakness throughout the summer.

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Analyst’s Disclosure: I am/we are 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.

Comments

[Tedamerica]

For me it would be nice to invest in the top run theme park in America and yet it causes me problems with my sleeping. How long will the Chines Virus persist - We are re opening in many parts of America and the cases are spiking. My theory is the same thing will happen with amusement parks, even Disney. My idea is to keep your powder dry, dont worry about missing the "big move" and wait until there is more clarity - like when the virus is under control via a vaccine or cure.

[erieohleagues]

Using numbers provided by Yahoo, I took 2019's financials to project 2020's. By closing May and June, and not being fully staffed, I assumed revenues would be 40% lower this year. By having COVID testing and addressing more-than-normal customer service relations, I assumed expenses would be 15% higher than 2019. I added in an extra $29 million in additional interest expense. I found that Cedar Point would be out of cash by the end of 2020. Please remember that all salaried employees were asked to take a 25% cut in pay. (They were promised to be reimbursed during the course of this year). While I'm not condemning Cedar Point for what they did, I am also assuming there were middle managers that left the company so they did not have to deal with the extra job responsibilities. 2021 short term probably won't look good either. As a years' long season pass holder, this year's pass is also good for next year. Cedar Point can't count on my money or any other season pass holder for 2021. Look for an equity raise?

[jackwgohs]

Thank you for this article, Professor Lance. I had expected a June distribution of $0.292 - very close to your projection and the actual payment declared. But my expected total annualized yield is far below yours. I agree with your methodology - adding the projected distributions for the other two months in the quarter to the June payment,so I'm not sure why our projections are different. I may be being overly conservative, but... To the June payment, I add ~$0.03 for CODI (April) and ~$0.02 for ATAX (June). The resulting quarterly total is ~$0.34. I agree with you that FUN will likely not pay a distribution for some time now (pursuant to its debt covenant) and the distribution situation with respect to UAN is unclear: while the business outlook seems much improved, it chose not to pay a Q1 distribution. I hope for but do not count on distributions for Q2, Q3, and possibly Q4. With this perhaps overly conservative bent, I am looking for a yield of ~16% at the $8.24 indicative value. Did I miss something here?

[ChagrinFalls]

Cedar Point opening info
www.clickondetroit.com/...

[JDZ25]

No one on these forums fully understands how much of a competitive advantage $FUN has because of its management team. Zimmerman and Fisher are the best operators in the business.

[User 51347884]

What’s the value of their real estate holdings ?

[brian65pls]

In this environment how does a professional value real estate? It's really difficult; just ask REIT managers.

[blasted]

Limited crowds is a great sales point. I might even go. I had a small position and I always wanted more. So I bought more at 30 and then an equal amount at $16.

[redsoxack2]

No mention of the fact they probably can’t let in more than 50% of usual attendance for the foreseeable future. I just don’t see how people can feel that they will have anything close to normal traffic at their parks for the next 12-24 months.

[Confoundedinterest]

Read again, it was covered twice... also these parks never hit 100% max “fire code” occupancy even on the busiest days so saying you can operate at 50% capacity every day is basically saying business as usual.

[Crunching Numbers]

@Confoundedinterest -

Read the comment of @richardsonbud20 more carefully. It states "...probably can’t let in more than 50% of usual attendance...", with the key words being "usual attendance" and not "theoretical attendance", and I'm fairly certain that's the correct way to look at this.

On a normal day lines are long and the rides that draw visitors to the parks are very long even with the rides packed to capacity. Maintaining social distancing in the lines and on the rides will present challenges that you haven't considered carefully.

This definitely won't be "business as usual."

[brian65pls]

This is very interesting. I would love to go to a park with limited attendance. It would be a different experience - I suspect much better for the attendee but not so much for the company (better than closed park).

[Kakaratto]

I think FUN is.a bit ahead of itself at this point valuation wise. Pre COVID it was 55 dollars a share, but now you have debt, and the interest on that, what will likely be a mediocre park season, and a large amount of uncertainty about the economy still, along with a suspended dividend. How do we know if Cedar Fair will be able to get the employees it needs?

I like the company, but not a buyer at 37. I probably sell the July 30p and look to enter via a short put.

It will make it back to 55 by 2021 sometime, but in this market I have better ways to deploy capital for now. Not enough upside when I can pick the right name and rip off 20%+ gains. FUN just can't move like that anymore imo.

[rmyurick]

And yet, in the market we find ourselves, it could go higher. Reality may not set in until Sept-Oct.