SIX - Cedar Fair: Pain Is Transitory And Shares Look Cheap

2023-06-16 11:28:29 ET

Summary

• Cedar Fair, L.P.'s recent financial performance has been weak, with revenue, profits, and cash flows showing signs of decline.
• The company attributes a decline in attendance to inclement weather and season pass visitation issues at its Knott's Berry Farm location from the prior year.
• Despite short-term concerns, Cedar Fair's stock appears undervalued compared to peers, and the company's long-term prospects remain positive due to continued investments and its season pass strategy.

Sometimes when it comes to investing, short-term pain comes before long-term gain. That pain can take different forms. It could be an actual loss of capital. Or in some cases, like what we have seen over the past several months with theme park operator Cedar Fair, L.P. ( FUN ), it could just be in the form of generating upside that significantly trails what the broader market achieves.

Financially speaking, Cedar Fair has deserved the lackluster performance that it has achieved. After all, revenue, profits, and cash flows have all shown signs of weakness. But when you look at the bigger picture and focus on the long haul, you see that these troubles are almost certainly transitory. Because of this, and because of how cheap the stock is, both on an absolute basis and relative to similar firms, I still feel comfortable rating the company a "buy" at this time.

Short-term weakness

Back when I last wrote about Cedar Fair in an article published in December of 2022, I took a rather bullish stance on the company. Leading up to that point, the firm had done quite well to recover from the COVID-19 pandemic. Revenue, profits, and cash flows, were all significantly outperforming what the company had achieved in 2021. On top of this, shares of the company looked very cheap. This led me to rate the enterprise a "Buy" to reflect my view at the time that the stock should outperform the broader market moving forward.

Unfortunately, the picture has since changed, and not in a good way. While the S&P 500 (SP500) is up 14.8% since the publication of that article, shares of the theme park operator have increased by only 3.7%.

This return disparity can really be chalked up to recent financial performance. During the first quarter of the 2023 fiscal year, for instance, the company reported revenue of $84.6 million. That's down quite a bit from the $98.8 million reported the same quarter one year earlier. Interestingly, this drop occurred even as the in-park per capita spending of its visitors jumped 9.5% from $58.86 to $64.47 in the course of one year. The decline, then, was driven not by that, but instead by a decline in attendance. Overall attendance dropped from 1.45 million to 1.06 million. This occurred even as the number of operating days for the company grew from 130 to 161.

With some companies, determining where the pain is can be difficult or even impossible. But the great thing about Cedar Fair is that the management team provides a great deal of clarity for investors. According to the firm, this decline in attendance was driven largely by inclement weather, with some of the pain also driven by season pass visitations that were attributable to the extension of 2020 and 2021 season-long products at the firm’s Knott’s Berry Farm location.

With the decline in revenue also came a drop in profitability. The firm went from generating a net loss of $85.7 million in the first quarter of 2022 to generating a net loss of $133.4 million the same time this year. Operating cash flow went from negative $95.4 million to negative $107.1 million. If we adjust for changes in working capital, we would get this number still worsening from negative $99.1 million to negative $113.8 million. And finally, EBITDA for the business plunged from negative $68.4 million to negative $101.1 million. To see how different the first quarter of this year has been, you need only look at financial results for 2021 and 2022 as shown and the chart above. Robust attendance, some of which was offset by a modest decline in in-park per capita spending, was responsible for the surge of revenue and profits in 2022.

Given the broader economic uncertainty that we have seen, and what that implies moving forward as interest rates remain elevated, I can understand why some investors may view a prospect like Cedar Fair in a negative light. After all, cutting down theme park visits would not normally be out of the question for consumers if the economy is suffering.

Fortunately, as the image below illustrates, with the exception of the COVID-19 pandemic, Cedar Fair has a long history of weathering economic pain. Unless we see a financial crisis that is similar in magnitude to what was seen in 2008 and 2009, I don't see a meaningful drop in profits or cash flows for the company in the foreseeable future.

Although the company is not the big leader in its space, it is a meaningful player with a nice niche that it controls. More likely than not, continued investments made by management will keep this ride going for the long haul. Since 2012, for instance, management has allocated over $1.6 billion toward capital improvements aimed at things like adding new rides and attractions, expanding and upgrading certain facilities, and increasing its resort offerings.

In fact, the company is currently working on a significant refurbishment program that will see all of its hotels refurbished by the end of 2024. And when I mentioned new rides and attractions, it's worth noting that the company has, since 2012, added 16 roller coasters across its properties, in addition to an undisclosed number of other attractions and rides.

Another big initiative used by management to create value for its investors is what it refers to as the season pass strategy. Consider, for instance, the company's famous Kings Island Resort in my home state of Ohio. It offers three different levels of season passes: the prestige, the premium, and the gold. Guests who pay for these get attractive terms on visitation and unparalleled flexibility for the entirety of the season in question. In 2022, 59% of the attendance at the company's parks was made up by season pass holders. This compares to only 39% back in 2012 and 52% in 2019 before the COVID-19 pandemic struck.

For the current fiscal year, management has not provided any guidance. But the way I see it, 2023 is unlikely to be worse than 2021 was. In the chart above, you can see how shares of the company are priced using data from both 2021 and 2022. In the table below, meanwhile, you can see how the stock is priced relative to two similar firms. In both of these cases, using the results from 2022, Cedar Fair ended up being cheaper than its peers. Of course, if the firm were to revert back to the levels of profitability seen in 2021, it would be the most expensive of the group. But that assumes that they also don't experience weakness.

Takeaway

From all the data that I see at my disposal, I understand why the market might be hesitant about Cedar Fair at this time. A decline in attendance is never great to see, and it is possible that the picture could worsen because of broader economic concerns.

In the grand scheme of things, however, I believe that these issues are short-term in nature. Furthermore, FUN stock really does look attractive from a valuation perspective, both relative to similar firms and on an absolute basis. Given these findings, I believe that additional patience from investors is necessary. And with that patience in mind, I have decided to keep the "Buy" rating I had on Cedar Fair, L.P. stock previously.

For further details see: