Cedar Fair Running Off The Tracks?

By Greg Sushinsky | January 06, 2009 AAA

Cedar Fair (NYSE:FUN), a limited partnership based in Sandusky, Ohio and owner of major amusement parks around the country, including Cedar Point, King's Island and Valley Fair in the Midwest, Worlds of Fun and Knott's Berry Farm in California, along with several other attractions, presents a quandary for investors. Despite recently improved earnings and a high dividend, Cedar Fair suffers from the negatives of high debt and faces a likely downturn in its business. So what should investors do, given these mixed signals?

The Financial Roller Coaster
Cedar Fair is known for its super roller coasters, especially at its home park, Cedar Point, in Ohio. From the American classic, Blue Streak, right on up to the recent Millennium Force, the company's performance has somewhat mirrored these rides in recent years. Despite the seasonality of the amusement park business, Cedar Fair has largely been able to remain profitable. However, the 2006 acquisition of Paramount Parks caused it to take on a huge debt load to finance the purchase, which threw the company into negative earnings territory. The company's debt has proved to be a pretty bumpy ride because much of it is still being carried, while the company tries to integrate the substantial number of parks it bought and now runs. (For more on acquisitions, read What Makes an M&A Deal Work?.)

A Smoother Ride
As recently as a couple of months ago, Cedar Fair announced positive earnings results from its main seasonal operations for the spring and summer of 2008. This is no small feat, given the difficult economy, that the company's financial coaster ride picked up some positive steam. Competitors Disney (NYSE:DIS) and Six Flags (NYSE:SIX), for example, did not fare so well. Disney, a long-distance travel destination that only can be enjoyed at higher customer costs, had trouble with the economy. And Six Flags had even greater stress, as speculation ,mounted about its survival as a company going forward. Given the economic context, Cedar Fair's results sparkle. As it pays a dividend that amounts to a pass-through of a yield of 13% to 14% recently, investors may think Cedar Fair's ride is routed directly towards the investing sky. (Read The Importance of Dividends to see why this lucrative distribution is good for investors.)

A Dip Along the Way
Not so fast! Along with the hefty payout, Cedar Fair still carries a hard-to-digest $1.7 billion in debt from the acquisition of Paramount, which it is still working to integrate. A recent note by Standard and Poor's downgraded the Cedar Fair debt, citing the difficult economic conditions it will face during the 2009 amusement park season. Looking at this projection more closely, the economic difficulties for the Cedar Fair family of parks will be greater than the appeal of amusement parks as a destination for entertainment and leisure - even during the recession. (To learn more about this hotly debated topic, be sure to read The Debt Ratings Debate.)

Why the Caution Light?
The cost for a family to enjoy a day out at an amusement park is not as cheap as it once was. At around $40 per person, the cost of getting through the gate adds up quickly for most families. With consumers watching their vacation, leisure and entertainment dollars more carefully, competitors become an increasingly greater threat. Now that Cedar Fair is nationwide, it is more directly affected more by this competition. Furthermore, Cedar Fair lacks the diversity of a company like Disney, which has vast entertainment holdings beyond its amusement parks. Disney's diversification across entertainment genres generates the financial resources it needs to weather the economic downturn. Meanwhile, Cedar Fair just has its only parks.

However, another factor may have a longer-term impact on the health or demise of Cedar Fair than even the ongoing recession. And that is the sea change in the rust belt economies. Cedar Point, the flagship park and core of Cedar Fair, draws much of its crowd from Michigan, which has been devastated by the severe problems in the auto industry. The rest of its visitors come from a mix of places outside of the region, but the immediate region of Ohio, Indiana and Pennsylvania (all rust belt states) are heavily blanketed with embedded secondary auto industry businesses such as suppliers.

Watch the Wild Ride
Cedar Fair has been a resourceful, dynamic company in a difficult industry. Arguably, it is the pure leader in its field. But the sustained economic downturn, the company's heavy debt load resulting from the purchase of Paramount Parks and the slumping rust belt economy indicate that investors should proceed with caution.

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