Earnings Analysis: Cedar Fair (FUN)
Earlier this week, Cedar Fair announced their second quarter earnings results. Revenues came in at $393M and earnings came in at $0.55, both were significant misses to expected targets of $405.88M and $1.04, respectively. All this despite the fact that the company continues to report record quarterly revenues, expecting another year of record results, and increased attendance. This seems to be a very mixed message. Were these good results or bad? Who was right, who was wrong, and what does this mean going forward? I hope I can dig into this a little and create some sense from it.
First off, let's look at the story the earnings and revenues misses tells. Earnings, which typically drives headlines was off a whopping 47%. That's a huge miss. However, revenues were off only a little over 3%. That's a disappointing miss, but it's no 47%, so that's a plus. Something happened between revenues and earnings, so what was it? Are expenses out of control? When looking at operating earnings vs. expenses, both are up a little over 1%, so this isn't the factor. Instead, there was an early debt payoff of over $23M which occurred. This is a one-time factor, and in reality early debt payment is a good thing. So in short, we know things weren't awful. There are very legitimate and, overall, positive reasoning for the earnings to be low. We can now let that go and adjust accordingly.
Now that we figured that part out, we can calculate that the company would've earned approximately $0.98 in earnings (adding the $23M to net earnings and dividing by share count). Next question is why did earnings miss expectations. Were the estimates reasonable, or were the larger than likely possible. The company did report record revenues for the quarter, after all. The truth behind that is a little difficult to determine. A non-core water park was no longer in the picture, which would force an expectation of lower revenues, however, the second quarter also benefited from a late Easter, which pushed revenues from the typical first quarter into the second. So it's possible that analysts got ahead of themselves - until you heard the conference call and management lowers the boom. They have now stated that meeting the 3 year EBITDA target of $500M a year early is now at risk.
Ouch.
To date, weather has been the primary impact to expectations. While growth has been good, it's been less than anticipated and much of this had to do with a very rainy June across the Midwest. Weather is a risk factor to an industry like this, but it's also seen as something that balances out over the course of a year. So while things have been slow early on, management sees things averaging out over the year. They acknowledge that meeting the $500M EBITDA target won't be easy, but it's not unachievable either. So where does that leave us as investors?
To begin with, I have to lower my earnings expectations. I will factor the one-time impact of the debt repayment into my numbers, though. As such I now expect earnings to be about $3.07, but adjusted earnings (the earnings I'll use to determine stock price) would be lowered to $3.48. This is to take out the losses from this quarter as well as an extra three pennies of earnings I expect will be missed by missing the $500M adjusted EBITDA target. Because earnings are slowing, I'm also going to lower my multiple to 19 at this time. This creates a 2017 price target of $66 - meaning the selloff from these results are warranted, though possibly slightly overdone. Looking out to 2018, I'm going to estimate a modest 3.5% earnings growth. As such, I set a 2018 price target of $68.40. I maintain my stock rating of a 2 at this valuation. The company is still a strong provider of mild growth with a strong dividend and is a good stock to help balance my portfolio - especially in times of economic pressure. While we don't see that pressure now, it doesn't mean we won't and it's always wise to be diversified.
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.
First off, let's look at the story the earnings and revenues misses tells. Earnings, which typically drives headlines was off a whopping 47%. That's a huge miss. However, revenues were off only a little over 3%. That's a disappointing miss, but it's no 47%, so that's a plus. Something happened between revenues and earnings, so what was it? Are expenses out of control? When looking at operating earnings vs. expenses, both are up a little over 1%, so this isn't the factor. Instead, there was an early debt payoff of over $23M which occurred. This is a one-time factor, and in reality early debt payment is a good thing. So in short, we know things weren't awful. There are very legitimate and, overall, positive reasoning for the earnings to be low. We can now let that go and adjust accordingly.
Now that we figured that part out, we can calculate that the company would've earned approximately $0.98 in earnings (adding the $23M to net earnings and dividing by share count). Next question is why did earnings miss expectations. Were the estimates reasonable, or were the larger than likely possible. The company did report record revenues for the quarter, after all. The truth behind that is a little difficult to determine. A non-core water park was no longer in the picture, which would force an expectation of lower revenues, however, the second quarter also benefited from a late Easter, which pushed revenues from the typical first quarter into the second. So it's possible that analysts got ahead of themselves - until you heard the conference call and management lowers the boom. They have now stated that meeting the 3 year EBITDA target of $500M a year early is now at risk.
Ouch.
To date, weather has been the primary impact to expectations. While growth has been good, it's been less than anticipated and much of this had to do with a very rainy June across the Midwest. Weather is a risk factor to an industry like this, but it's also seen as something that balances out over the course of a year. So while things have been slow early on, management sees things averaging out over the year. They acknowledge that meeting the $500M EBITDA target won't be easy, but it's not unachievable either. So where does that leave us as investors?
To begin with, I have to lower my earnings expectations. I will factor the one-time impact of the debt repayment into my numbers, though. As such I now expect earnings to be about $3.07, but adjusted earnings (the earnings I'll use to determine stock price) would be lowered to $3.48. This is to take out the losses from this quarter as well as an extra three pennies of earnings I expect will be missed by missing the $500M adjusted EBITDA target. Because earnings are slowing, I'm also going to lower my multiple to 19 at this time. This creates a 2017 price target of $66 - meaning the selloff from these results are warranted, though possibly slightly overdone. Looking out to 2018, I'm going to estimate a modest 3.5% earnings growth. As such, I set a 2018 price target of $68.40. I maintain my stock rating of a 2 at this valuation. The company is still a strong provider of mild growth with a strong dividend and is a good stock to help balance my portfolio - especially in times of economic pressure. While we don't see that pressure now, it doesn't mean we won't and it's always wise to be diversified.
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.
Nothing on this site should be taken as advice, research, or an invitation to buy or sell any securities. All views expressed are solely of my own and I am not a professional money manager. Please consult with your financial adviser before taking any action in your own portfolio.
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