Stock Analysis: Cedar Fair (FUN)

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.

Cedar Fair announced their third quarter results on Thursday.  The recorded record revenues of $645M which generated EPS of $2.92.  In addition, they increased their quarterly payout by ten cents, which is a rather significant increase in shareholder distribution.  EPS was a bit below analyst estimates of $3.46 due to currency translation and increased spending, while revenues beat expectations of $633.34M.  This is where EPS is hard to leverage as a gauge for company performance due to the heavy investments that take place to generate revenues.  In these situations, EBIDTA (Earnings Before Interest, Depreciation, Taxes, and Amortization) becomes a key indicator.  For Cedar fair, EBIDTA was up 10%, however, I have no gauge on what was desired or expected.  Based upon how the stock has responded since, it's hard to consider this quarter bad just because earnings missed expectation.  The company grew revenues by over 10% as well as EBITDA, average guest spending increased 2% and there was a record for attendance and spending at the parks, including a 2% increase in unique visitors.  In short, the spending that has taken place appears to be resulting in increased revenues.  While this hurts earnings growth in the short term, there typically is a lot of appreciation for increased distributions and increasing revenues.  

Cedar Fair has now completed the "earnings periods" of their years.  With the end of the third quarter comes the end of revenues and earnings for the year, due to the fact that this is an outdoor amusement park and there is little they can do to stay open and make money during this time of year.  They'll get some profits from their Halloween events, which they noted to be strong with their preliminary numbers, and they'll have some Christmas events as well.  Outside of this, most of the company's time will be spent preparing for the next year, which will include a number of new attractions and other events they are beginning to plan.  I see a couple risks going into the next year.  One is that Halloween is going to be on a Monday, so it's possible they'll lose some business compared to the last two, which were strong due to the weekend holiday.  Weather is an ongoing factor.  This year was considered to be a "normal" year overall, so it was about average.  Outside of that, as long as the company continues to execute well, things look fairly positive.  They will try to increase some prices, which might go fairly unnoticed with an economy that's getting stronger, and energy being cheap.  I am a little concerned that the growth rate seems to be slowing some, meaning its multiple might become pressured.  This is harder to gauge when the multiple might be based more on EBITDA than on earnings, though, too.  Add to it an environment where it's becoming more likely that the Fed will hike rates, and people will start going away from "safety stocks" like MLPs (which FUN is). 

In the end, I see this a little differently.  I have, right now, a stock that is increasing it's distribution while growing it's profits at a pace unlike most "safety stocks."  It's in my portfolio as it's more likely to manage a difficult turn in stocks and with it's current 5.6% yield, which is very safe, it pays me well to hold it if the stock's price does need to slow down for a bit.  Looking ahead, I see earnings next  year of around $2.80.  Analyst expectations right now are much higher, but I am not sure if those estimates need to be lowered based on what I've seen this year.  The company is also currently getting a multiple base of 24 times this year's earnings.  If I leveraged that to my 2016 estimate, I get a price target around $67.  For now, I think this is a relatively reasonable setup.  I acknowledge it's possible that multiple could come down - especially if earnings are slowing and the market is picking up.  However, as I said, that yield has some value as well.  Given the price increases, I now consider this stock to be a 2.