DIS - Cedar Fair: Seems Like FUN Ahead

2023-03-24 18:56:33 ET

Summary

• Cedar Fair, L.P. witnessed a substantially improved operational performance in terms of attendance and in-park as well as out-of-park revenues in 2022.
• The stock is still trading at around a 20% discount from its 52-week high price.
• Cedar Fair is one of the major players in the amusement and theme parks industry.

Investment Rationale

Cedar Fair, L.P. (FUN), operating in the amusement parks industry, posted impressive operational results for 2022 . The company witnessed a substantially improved operational performance in terms of attendance and in-park as well as out-of-park revenues owing to higher customer demand.

Post the announcement of results, Cedar Fair’s stock has gained good momentum. However, FUN stock is currently trading at around a 20% discount from its 52-week high price. The company's strong fundamentals, robust growth prospects, and attractive valuation make Cedar Fair stock a compelling investment opportunity.

About the Company

Cedar Fair operates regional amusement parks and water parks along with resorts, hotels, and recreational properties. Its amusement parks are family oriented with recreational facilities for all aged people. The company generates its revenues from sales of admission tickets in amusement parks and water parks, food, merchandise, and games both inside and outside the parks, and accommodations, extra charge products, and other revenue sources. A substantial portion of Cedar Fair's revenue is concentrated during the peak vacation months of July and August. Families and young people in the age group of 12 to 24 years form the most important demographics for the company.

Outstanding operational performance

The year 2022 has proved to be a year of phenomenal growth for Cedar Fair. Net Revenues gained attractively after a subdued operational performance in 2020 due to the COVID-19 pandemic. On a YoY basis, the revenues zoomed 36%, whereas compared to 2019, which was the immediate prior year to the COVID-19 pandemic, the number rose 23%. As seen in the figure below, in the past five years, Adjusted EBITDA has climbed from $467.77 million to $551.95 million after falling to -$302.01 million in 2020.

Cedar Fair’s net income took a cheerful spin, turning positive from the net losses suffered in the prior two years. These key parameters indicate a solid improvement in Cedar Fair's operational performance.

Healthy Liquidity and Debt Profile

Cedar Fair’s primary source of liquidity includes cash from operating activities, funding from long-term debt obligations, and existing cash on hand. Cedar Fair's cash flow from operations as well as free cash flows have recovered well and have crossed the pre-pandemic levels after sustaining a negative impact in 2020. Cedar Fair's business model includes a reliable revenue stream as 2/3 ^rd of its revenues is generated via ticketing channels with pre-purchase commitments. Such a revenue stream generates predictable cash flows which help the company to take efficient decisions.

Repayment of $264 million debt during 2022 led to the company's leverage ratio contracting to 4x from 7x in 2021. To repay the debt, Cedar Fair used part of the proceeds from the sale of the land at California’s Great America Amusement Park for $310 million. The company’s net debt number, which currently stands at $2.198 billion is progressing towards the company’s target of $2 billion. In Q32022, the company repaid all its outstanding variable long-term debt. The debt outstanding at the end of 2022 consisted primarily of fixed-rate debt except for revolving credit borrowings.

Resumption of returning value to shareholders

Cedar Fair introduced a $250 million unit repurchase program in August 2022. Till January 31, 2023, the company repurchased approximately 5 million limited partnership units. An impressive net income number as well as the commencement of share buyback fortified the diluted EPS number, pushing it beyond the pre-pandemic level. Execution of further repurchases should drive the EPS higher, thus making Cedar Fair gain more shareholder confidence.

Additionally, Cedar Fair and Comcast Corporation ( CMCSA ) are the only two companies in their peer universe to pay dividends in 2022. Going into 2023, the company’s focus will remain intact to distribute higher returns to its shareholders.

Attractive attendance levels

The 2022 results demonstrated the second-highest attendance year in Cedar Fair’s history. The company's resort properties showed an impressive performance which led to in-park per capita spending nearing its historical highs and out-of-the-park revenues recording at higher levels.

The attractiveness of in-park per capita spending was aided by a notable improvement in spending in the food and beverage channel and higher ticket prices due to Halloween events. The higher out-of-park revenues were driven by the re-commencement of Castaway Bay Indoor Waterpark and the Sawmill Creek Resort, after being closed for renovation in 2021.

As seen in the chart above, the various revenue streams, along with attendance, saw a significant uptick after 2020. In 2022, attendance reached the pre-COVID levels and the revenue has actually surpassed that seen in the pre-COVID year of 2019.

Additional Growth Catalysts

The following growth drivers will play a crucial role in aiding the company's future optimistic performance and business outlook:

Expected Growth in Seasonal Pass Channel

Cedar Fair sold a record-high level of 3.2 million season passes for the 2022 season. Season pass attendance rose 10% over 2019 levels. The overall contribution of the season passes in the total attendance mix also increased to 59% in 2022 as against 52% in 2019. The company’s customers are more attracted to the seasonal pass channels due to the perks and benefits offered by them. As the company is entering into the spring sales period, it expects substantially higher purchasing for seasonal passes, which are the highest-priced tickets underpinning Cedar Fair’s outlook for revenue growth.

Focus on improvement in digital infrastructure

During the pandemic, Cedar Fair introduced a business intelligence function that is benefitting the company on two fronts, revenue management and dynamic pricing. The company also is actively working on improving its digital infrastructure in the parks. It is focusing on better connection of guests with applications which will reduce the need for labor and accelerate digital transactions. Thereby it is currently working on a mobile app for 2024 which will provide guests with improved visibility of in-park entertainment and dining options along with merchandise purchases through smartphones. The management believes that through cashless operations, the company will be able to make its operations more efficient, reduce operating costs and improve margins.

2023 priorities

In 2023, Cedar Fair will be focusing on revenue growth underpinned by paced-up demand at its new anchor restaurants at the two largest parks, Cedar Point and Knott's Berry’s Farm. The company expects an addition of 70 to 80 operating days. 80% of the company's adjusted EBITDA is generated from its five largest parks. It plans to increase investments in these parks which have attractive operating leverage and higher demand.

At the same time, the company has identified that investing in small parks has an instant effect on attendance numbers as well as demand which it likes to leverage. In February 2023, the company announced the first phase of an Esports facility at the Cedar Point Sports Center in Sandusky. With this, it aims to create Northern Ohio’s premier immersive gaming experience for leagues, camps, and clinics.

Additionally, Cedar is on the path to recovering the demand for its Fast Lane product, which had been unfavorably impacted in the past year. Getting back to the historical attendance levels will aid the growth of demand in Fast Lane, as this product is more in demand on the busiest days when people avoid standing in lines. While taking portfolio expansion decisions, the company has opted for controllership economics which involves taking full ownership of its properties and reaping full returns from the investments made in large as well as small parks.

Bright Industry Outlook

The global amusement parks market has developed from $67.16 billion in 2022 to $106.57 billion in 2023 at a rate of 58.7%. The amusement and theme park companies have gained good traction in their financial performance, coming out of the negative impact of the COVID-19 pandemic. Amusement parks remain an ongoing preference among various age group people, especially youngsters, which has the potential to enhance the ongoing demand. With the reopening of China's borders at the start of 2023, the overall demand outlook for the amusement and theme parks industry has strengthened.

Reasonable Valuation of FUN stock

Based on the forward P/E ratio and forward EV to EBITDA ratio, the shares of FUN appear to be reasonably valued compared to the stocks of its peer companies - The Walt Disney Company (DIS), Six Flags Entertainment (SIX), Comcast Corp (CMCSA), and SeaWorld Entertainment (SEAS).

Seeking Alpha’s proprietary Quant Ratings rate Cedar Fair as Strong Buy. It is rated high on revisions and profitability factors.

Conclusion

Cedar Fair, L.P. is one of the major players in the amusement and theme parks industry functioning with strong fundamentals and has exhibited outstanding operational performance in 2022. The year 2022 has proved to be a cheering year for the company, and its results show that Cedar Fair has the potential to continue the positive momentum. The priorities set for 2023 by Cedar Fair, L.P. also indicate a promising growth outlook. Additionally, FUN stock trades at a reasonable valuation compared to its peers. This makes Cedar Fair, L.P. stock a suitable investment opportunity for long-term investment.

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