Friday, February 19, 2016

Earnings 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.

Back on Wednesday, Cedar Fair announced their earnings results for the fourth quarter of 2015.  Results were quite mixed, recording a loss of $0.46 per share, and revenues coming in at $166.9M.  No guidance for the next quarter or year was directly provided.  

While seeing such a deep loss on earnings was a bit disappointing, it wasn't exactly a bad quarter.  As I said, revenues beat expectations, and fairly decently too.  Cash flow continues to be strong, and the investments they've made - especially in some of their resort spaces appear to be paying off.  Next year they'll be introducing a new roller coaster in their Cedar Point location and the season pass sales appear to be doing well.  They also announced that they were going to be hitting goals of $500M, in adjusted EBIDTA, earlier than the 2018 target that they originally had.

The down side and risks/concerns really are based on costs.  While much of the costs were capital expenditures as I just described, we are also seeing some significant increases in wages creeping in.  While great for employees, it's something of a concern to investors as it takes away profits.  The company is paying competitive prices to get the right kind of talent and are looking at more and more ways to leverage technology to help manage costs and believe they will be able to keep them under control, figuring a 2-3% increase in next year.  The focus of 2015 was increasing volume, with an increase of 1.1 million visits, this appears as though it was successful.  I believe there will be more focus in 2016 on pricing to help account for costs and investments.  

There was some difficulty processing these results and the call.  Clearly there are a lot of concerns around costs.  That said, the business seems to be doing well - or they wouldn't be hitting growth targets early.  That said, it was really hard to deny the level of enthusiasm that the management team displayed.  In particular, during the Q&A session, CEO Matt Ouimet made a statement I found particularly intriguing.
"I think before up to this point in FUNforward, we were writing new chapters, I think we're about to write a new book."
 I don't see this as a statement a CEO would make when things are risky, or he doesn't have something he sees to really back things up.  Similar to competitor, Six Flags, they are working to roll out more off-season events for Halloween and Christmas time.  Six Flags have been showing strong results for such movements, so I don't see why we can't expect the same here.  

Looking at pricing, I find myself getting more conservative.  Analysts have earnings expectations for 2016 that don't make sense to me.  This year, the company earned $1.99 per share, a 7% increase from 2015.  From an adjusted EBITDA perspective, the company could hit their goals this year, should they grow EBITDA almost 9% (they grew it 7% this year).  They hit their marks if they grow only 5% each of the next 2 years.  Despite these facts, analyst estimates for 2016 is $3.36.  That's a 69% increase over this year.  Maybe there's something I don't get or recognize yet, but something just doesn't seem to add up.  While I think the company is in great position, is priced too low based on its yield, and seems to be performing well, I'm struggling with justifying it's current multiple or its future earnings.  Perhaps some time will show me what I'm missing.  For now, I'll maintain my $2.80 estimate for 2016, though I feel that's not likely to be achieved.  I'm going to go with a multiple for the stock of 20, which is much lower than the industry or peer levels and name a price target of $61.50.  Providing payouts can be maintained (dividends aren't guaranteed, as this is a MLP) at current levels, my price target still leaves this stock with an over 5% yield.  I think this is the best I can do, but I need to learn more about what a fair price is for the stock and how to address growth for this kind of company.