Stock Analysis: Cedar Fair (FUN)

Notes:
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash.  Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.

Yesterday, Cedar Fair announced their second quarter's financial results.  They reported earnings of $1.02 off of an reveue base of $377.4M.  Revenues topped expectations slightly while earnings missed expectations slightly as well, mainly due to higher than expected costs.  It's important to note that these mid-year estimations are difficult to calculate with accuracy as the theme park business has only around 135 days of peak revenue generation, which is spread mostly between the second and third quarters.  The swings in expenses and revenues can fluctuate depending upon needs and weather as a minor example of impacts.  On a year over year basis, earnings were up almost 30% compared to last year and management expects the increased attendance and spending that we've seen so far to continue to stay strong, as evident in the over 5% increase in revenues through August second.  These signs indicate third quarter results should also be strong.

The story provided was mostly strong.  Attendance and customer spend both inside and outside the park were up compared to last year.  Also new tests and initiatives the company has been taking to encourage increased spend has been well received as well.  Despite the fact that season ticket sales have increased, reducing attendance revenues, those "losses" have been translated into repeat visits and increased park spending.  The increased park spend and use of promotions does inject just a little bit of worry, but it is common for the industry and it helps create a "need" to attend for special events.  The interesting note I felt I took away was how they are gearing to be more than just a place for rides, but more of a social experience meant to have fun.  I know mall traffic is down, so where will teens hang out?  During the nice weather months, the theme park may become that place.  When you see minimum wage increasing, and both millenial families and teenagers trending to find places to go to socialize and for the experience, this becomes an interesting investment where it can become the new mall where teens, in particular, are willing to part with their increased income - giving the company more freedom to adjust fees.  I know the 5 year trend for EPS growth right now has been sitting around 14%, but I feel this may be low, given this potential theme.  Even if it's not, the fact will be over the next couple years the company will likely continue to grow at a clip of around 25% per annum.  

Guidance from the analysts have come down some since last quarter, right now at $2.88.  This difficulty in extrapolating earnings due to when/how the company gets its earnings is a little difficult, but I'm concerned they may not make the annual earnings currently projected.  I'm going to play a little more conservatively and lower my guidance down to $2.65.  That's still an earnings increase of 35% from last year.  If the growth rate really is and does continue to decelerate, I still think a multiple of 25 is fair in the current market when considering key competitor, Six Flags (SIX) has a PE of over 28 while they are expected long term growth rates of only 8%.  This actually increases my price target to $66.25 for 2015 and my 2016 target would currently be in the low 80s.  Part of me feels like this is a bit on the aggressive side, but that's based mostly on how the market has performed over the last 7 months than it is a reflection of what money managers might pay for a company that's growing that fast and has an aggressively high yield that is maintainable.  I will maintain my status of a 1 for the stock, but it's at the very top of those levels right now.  If it goes any higher, I'll have to lower the stock to a 2 due to risk/reward factors in the short term.