2023-09-01 09:30:00 ET
Summary
- Theme park operators, including Cedar Fair, L.P., have seen signs of weakness in their share prices due to inclement weather resulting in lower attendance.
- Cedar Fair's revenue for the latest quarter of the 2023 fiscal year decreased by 1.7% compared to the previous year, primarily due to a decline in attendance.
- While bad weather has affected the theme park industry as a whole, not all operators have been impacted equally, with Disney experiencing a 1% rise in attendance and Six Flags seeing a 6.3% decline.
- Even so, shares of Cedar Fair look attractive right now, but investors would be wise to consider watching the business closely.
Who doesn't like to invest in companies that not only can make a profit, but that also provide goods or services that the person investing enjoys? One thing that I have always enjoyed has been the concept of the theme park. The ability to enter some magical realm of fun and excitement has always been appealing to me. Unfortunately, after staging a fantastic recovery following the COVID-19 pandemic, some theme park operators have started seeing signs of weakness. This pain has largely been attributed to inclement weather and the end result has been share prices that have underperformed the broader market.
One really good example of this can be seen by looking at Cedar Fair, L.P. ( FUN ). Even with the recent pain, though, shares of the company do look fundamentally cheap, and it's important to note that these tough times will not last forever. So while it is possible that shares will continue to underperform in the near term, those who are focused on the long haul might want to consider a stake in the enterprise.
Not all fun and games right now
In my last article about Cedar Fair that was published in June of this year, I acknowledged that recent financial performance achieved by the company had been weak, with revenue, profits, and cash flows experiencing year-over-year declines. The drop in attendance seemed to be driven by bad weather, as well as some other issues. But at the end of the day, shares of the business looked cheap enough to warrant optimism for those focused on the long run. This led me to rate the company a "buy," a rating that reflected my view that shares should outperform the broader market for the foreseeable future. Since then, the stock has sadly underperformed. Shares are down 4.6% while the S&P 500 (SP500) has risen 2%.
As you might have guessed, financial pain for the firm has continued, and that has been the reason why shares have underperformed. To see what I mean, we need only look at data covering the second quarter of the company's 2023 fiscal year. When I last wrote about the enterprise, we did not have that data available. According to management, revenue for that time came in at $501 million. That is 1.7% lower than the $509.5 million reported one year earlier.
There are a couple of items that go into making these revenue numbers possible. For instance, Cedar Fair did manage to benefit from the fact that the per capita spending of its visitors rose from $59.52 in the second quarter of 2022 to $61.46 the same time this year. Although this may not seem like a huge difference, when applied to the number of visitors the business had in the most recent quarter, not having this increase would have translated to revenue coming in $14.35 million lower than it ultimately did.
And that brings us to the other item, which would be overall attendance. And this is where the pain showed up. During the quarter, the company's parks collectively had attendance totaling 7.40 million. That is a substantial decline of 5.7% compared to the 7.85 million visitors reported during the same time one year earlier.
Before we get into bottom line results, I would like to talk some about the industry more broadly. While management has been saying that inclement weather has been responsible for this drop in attendance, other sources are also indicating this to be the case. As pointed out elsewhere here on Seeking Alpha, Macquarie recently cut estimates for this particular sector because of the risk associated with "structural weather impacts" moving forward. Examples of this bad weather include higher than normal rainfall, high temperatures, and smoke that has drifted down from Canada thanks to the wildfires up there. Changes in consumer spending were also cited as a reason for the downgrade.
Although I have no doubt that bad weather has played a role here, I do think it's important to note that not every theme park operator has been impacted significantly. In fact, as part of my research for this article, I looked at the most recent quarterly data for competitors like Six Flags Entertainment ( SIX ), SeaWorld Entertainment ( SEAS ), and The Walt Disney Company ( DIS ). What I found is that SeaWorld did, indeed, also see a decline in attendance. But its drop was only 2% year-over-year. This came even as the company experienced an increase in per capita spending at its parks, from $80.59 last year to $80.80 this year. That rise was far smaller than what Cedar Fair experienced.
Outside of SeaWorld, the other two players that I looked at actually saw increases in attendance year-over-year. At its domestic parks, Disney reported a 1% rise in attendance. I am excluding its international parks, since those reported significant increases as certain countries started, over the past year and a half, easing up on COVID-19 restrictions. Management does not provide estimates of per capita spending at the theme parks. However, they did say that spending was roughly flat year over year. And finally, Six Flags actually saw attendance grow 6.3% year-over-year. However, this was accompanied by a 4.9% decline in per capita spending from $63.87 to $60.76.
What this all does seem to indicate is that not every firm is being impacted equally. Disney might be an exception, since it has the strongest brand power of probably any entertainment company on the planet. But the trend that we see with the other three theme parks here is that higher spending correlates to lower attendance and vice versa. So, the claim that consumers are experiencing difficulty does seem to be valid. It is unclear, however, how much inclement weather is actually impacting the situation.
You might expect a drop in revenue for Cedar Fair to be correlated with a decline in profits. But the picture is more complicated than that. Actual net profits managed to rise from $50.8 million to $53.6 million. However, operating cash flow plunged from $241.6 million to $120.2 million. Even if we adjust for changes in working capital, we would get a decline from $124.8 million to $103.9 million. Meanwhile, EBITDA dropped from $170.6 million to $151.4 million. For context, in the chart above, I provided financial results for the first half of this year as a whole relative to the same time last year.
And I also, in the chart below, provided a look at both attendance and per capita spending at the company's parks. What this illustrates is that the pain seen in the most recent quarter was also present throughout the first half of the year in its entirety.
When it comes to the rest of 2023, we really don't know what to expect. Management did state that the third quarter of this year should have three extra operating days compared to the same time last year. So that should help to some extent. But beyond this, we don't have a firm understanding of what the future holds. Clearly, inclement weather continues. So investors shouldn't be surprised to see attendance fall further. But this doesn't necessarily mean that the company is a bad prospect. At some point, financial performance should recover. And when it does, shares will look rather cheap.
In the chart above, for instance, you can see how shares of the company are priced using data from 2022. Single-digit trading multiples are always great to see. I also compared the company, in the table below, to both Six Flags and SeaWorld. Using both the price to earnings approach and the price to operating cash flow approach, I found that Cedar Fair was the cheapest of the three. And when it involves the EV to EBITDA multiple, it sits in between the other two.
Company | Price / Earnings | Price / Operating Cash Flow | EV / EBITDA |
Cedar Fair | 6.5 | 5.9 | 8.0 |
Six Flags Entertainment | 23.5 | 6.5 | 10.9 |
SeaWorld Entertainment | 12.8 | 6.4 | 4.8 |
Takeaway
I understand that we are currently dealing with rather difficult times for the theme park space. But those who are focused on the long-term picture should not be deterred. Shares of Cedar Fair, L.P. look cheap, both on an absolute basis and relative to similar companies. Add on top of this the transitory nature of the company's troubles, and I would argue that some upside still does exist from here. Because of this, I have decided to keep the company rated a ‘buy’ for now, even though the market clearly disagrees with me.
For further details see:
Cedar Fair: Not All Fun And Games Right Now