Given the maturity of the industry, attendance growth is unlikely to be a significant top line contributor. However, the industry has still managed to grow revenues at close to a 2% annual rate over the last five years. This seems like a fair starting point to model sales growth, although FUN may further boost top line growth through a number of recent initiatives to improve pricing, reduce discounts, and extend the season beyond the second and third quarter. Strategically, management is focused on enhancing the guest experience with premium product offerings, dynamic pricing and advance purchases (i.e. season passes, etc.). Given the company’s fixed-cost structure, incremental top line gains should ultimately drive higher margins and increased cash distributions to unit-holders. Again, Broyhill assumes little margin expansion in its base case but believes FUN has room to improve its stable, industry-leading EBITDA margins by roughly 100 bps over the next three years.
With only six analysts covering the stock, shares were slow to rerate after the company suffered financial difficulties during the financial crisis. While this is an extremely capital-intensive business—with annual capital expenditures approximate 9% of sales—with a highly fixed cost structure, FUN generates very consistent cash flow, which is largely recession-resistant. Consequently, management has been able to consistently deleverage its balance sheet since the crisis, leaving significantly more cash available for distribution while putting the company on a much stronger financial foundation. The resulting capital allocation story is the foundation of Broyhill’s investment thesis, as the bulk of the company’s cash flow can now be returned to investors rather than building new parks, acquiring competitors, or paying down debt. Note that Broyhill’s estimates of cash distributions are reported in the final section of this report.
Finally, FUN’s core assets, located largely in “Middle America,” are well positioned to capitalize from any economic benefit related to the potential for a domestic manufacturing resurgence. Admittedly, economic shifts of this magnitude are difficult to predict with a great level of confidence, but the evidence here is increasing. Note the steady increase in energy and transportation costs over the past decade and the more recent collapse in domestic energy prices driven by an unprecedented surge in natural gas supply. Natural gas was priced at $4 in the U.S. in April versus $17 in Japan and Korea. The consistent increases in Chinese labor costs alongside declining unit labor costs at home represent an additional tailwind. Meanwhile, manufacturing GDP has grown at almost double the pace of overall GDP during the current recovery. As a result, manufacturing employment is growing at nearly twice the average rate in states like Ohio, where overall employment is near its prior peak. This bodes well for Cedar Fair’s core markets, as the majority of the company’s EBITDA and flagship properties are based in the Midwest.
The Market Realist Take
The company believes adjusted EBITDA is a meaningful measure of its park-level operating results. This increased to a record $318.4 million for the third quarter of 2013 from $292.3 million in 2012, reflecting a 9% increase in adjusted EBITDA for the quarter. The solid increase in adjusted EBITDA is a direct result of the strong revenue and attendance trends produced by its parks during the quarter combined with its ongoing focus on cost control. Its adjusted EBITDA margin for the quarter improved 100 basis points compared to the third quarter of 2012. For the full year, it anticipates being at the high end of its adjusted EBITDA guidance range of $415 million to $425 million—a 6% to 9% increase over last year’s adjusted EBITDA.
Cedar Fair believes the continued strength of its business model, combined with strategic capital investments, will allow it to generate higher revenues and ultimately achieve its long-term growth goal of $450 million in adjusted EBITDA earlier than the original target of 2016.
Cedar Fair peer Seaworld Entertainment (SEAS) reported adjusted EBITDA of $254.4 million for 3Q 2013—an increase of 10% over 3Q 2012. The company said this improvement was driven by an increase in revenues and that it’s a 300 bps increase in margin from 44% in the third quarter of 2012 to 47% in 2013. For Six Flags (SIX), adjusted EBITDA of $268 million for 3Q 2013 represented an $11 million or 4% improvement over the prior year and included a $3 million accrual for estimated litigation costs relating to the July 19 accident at Six Flags Over Texas. The company expects to achieve $500 million of modified EBITDA, which equates to nearly $3 of cash earnings per share by 2015.
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