Cedar Fair, L.P.
In the eyes of Broyhill Asset Management (BAM), ideal investment candidates have the potential to double over a three-to-five year horizon, as chief investment officer Christopher Pavese seeks to purchase shares at an equivalent discount to intrinsic value based upon a company’s normalized earnings power. This hurdle, combined with Broyhill’s quality mandate, tends to limit the firm’s investable universe, and as a result, Pavese will often hold high cash balances in the absence of opportunity. But when BAM finds high-quality businesses with defensive characteristics, high barriers to entry, and pricing power that are distributing cash to owners, they are sized accordingly. Cedar Fair (FUN) meets each of these requirements and recent weakness—driven by short-term panic created by rising interest rates rather than long-term fundamentals—presented investors an attractive entry point to purchase shares, now yielding nearly 6%.
The amusement park industry is a clear-cut and easy-to-understand business model. Cedar Fair owns and operates amusement parks and generates almost all of its revenues from the sale of tickets in addition to food and merchandise. Unlike peers in the leisure industry, FUN’s revenues are incredibly resilient, as its regional parks cater to recurring “day-tripping” visitors from the surrounding area rather than long-distance visitors to destination parks. As a result, the business enjoys a natural economic stabilizer during difficult times, as consumers cut back on more expensive vacations in favor of the value offered by amusement parks closer to home. BAM analyzed attendance records going back to 1990 and found only three instances where the industry’s head count declined, but only a single period in which revenues fell year-over-year. In each of these instances, the recovery in the following year made up nearly all of the lost ground. This is a very good business.
The amusement park industry is a highly concentrated, mature industry that benefits from high barriers to entry in the form of limited land supply, arduous zoning restrictions, and substantial capital requirements. With major markets already well served by established incumbents, new entrants have little hope of gaining ground with thrill-seekers. This competitive landscape provides Cedar Fair with significant economies of scale through its near monopolies of niche markets. Consequently, there has been zero growth in the number of amusement parks over the last decade. FUN management has previously commented that there has not been a successful new regional park built in the past three decades. Furthermore, Google has yet to announce plans to start building rollercoasters on this planet (others may be up for discussion).
The Market Realist Take
In its latest quarterly results, Cedar Fair reported a 7% increase in revenue, to $592.1 million, over last year’s third quarter due to a combination of increased attendance, average in-park guest per capita spending, and accommodations revenue. It saw a 7% (or $2.83) increase in average in-park guest per capita spending to $45.73, along with an 8% (or $4.4 million) increase in out-of-park revenues to $58.7 million. Excluding two non-core stand-alone water parks sold in November 2012 and August 2013, attendance on a comparable park basis increased 2%, or 207,000 visits. Its parks are on pace for a fourth straight record year, as net revenues through November 3, 2013, increased 6%. It expects to achieve full-year net revenues between $1.125 billion and $1.135 billion.
Cedar Fair saw good response to its capital plans, strong momentum in season pass sales, continued success in premium product offerings and broad improvements in its food and beverage offerings this past year. Its investments in ecommerce and CRM platforms have paid off, as they’ve been instrumental in increasing yield and emission across all channels, including season pass group and individual sales.
The company has a strong cash flow, and combined with the proceeds from its sale of two non-core stand-alone water parks, it has contributed to a healthy liquidity reserve. This has given Cedar Fair the flexibility to increase cash distributions as well as invest in strategic long-term growth initiatives.
Since theme parks need to maintain their attendance levels to generate revenue, the company needs to continue innovating by adding new rides and attractions for enhancing guest experience. Cedar Fair stated in its earnings release that in 2014, it will launch Banshee, the longest inverted coaster in the world, at Kings Island. It will also introduce the first edition of its Amusement Dark portfolio, Guardian of Wonder Mountain, at Canada’s Wonderland. It will make additions to its popular cottages and cabins at select parks, along with an in-park TV network that will provide additional entertainment for guests.
According to the report “Amusement Parks in the US” by market researcher IBISWorld earlier this year, the U.S. theme park industry earned a revenue of $14.1 billion last year and expects a 2.8% increase in revenue this year, to $13.4 billion. Research from Global Industry Analysts stated that the global amusement and theme park market expects to see revenue growth of around $32 billion by 2017. Despite being considered “recession-proof,” the industry was hit by the economic crisis in 2009, when companies including Cedar Fair saw dwindling attendance and declining revenues. However, its fortunes have rebounded in the recent past with the economic recovery.
Cedar Fair’s main competitors include Six Flags Entertainment (SIX), Seaworld Entertainment, Inc. (SEAS), Walt Disney Parks and Resorts—owned by The Walt Disney Company (DIS)—and Universal Parks and Resorts (also known as Universal Studios Theme Parks), the theme park division of NBCUniversal, a subsidiary of Comcast (CMCSA). Six Flags reported a 4% increase in revenue in 3Q 2013 compared to the same quarter in 2012. It expects product development innovations, strategic pricing, yield, and season pass initiatives to build strong business momentum in 2014. Seaworld reported a 3% increase in revenue compared to the same period in 2012. It said its revenue performance was driven by strong results at its SeaWorld–branded parks, continued benefits from its pricing and yield management efforts, and effective cost management. However, the revenue increase was partially offset by a decrease in attendance. Seaworld said admissions declined 3.6% in the quarter, compared with a 9.5% drop in the previous quarter. Walt Disney (DIS) said its Parks and Resorts revenues increased 9%, to $14.1 billion, and segment operating income increased 17%, to $2.2 billion, for the year ended September 30, 2013.
According to industry experts, theme park stocks tend to perform well even in a sluggish economy because consumers prefer driving to a local theme park rather than paying for an expensive vacation. Meanwhile, an improving economy and low gas prices are driving profits for these companies.