Cedar Fair Still Searching For Fun

By Greg Sushinsky | May 11, 2009 AAA

Amusement park operator Cedar Fair (NYSE:FUN) is about to embark on the all-important opening of its season, which will show just how the company will be doing as the summer unfolds. Although it recently reported first-quarter earnings with a $56 million loss, the Q1 represents less than 5% of its annual revenues. Cedar Fair owns large amusement parks around the country, including Cedar Point and Kings Island in Ohio, as well as Worlds of Fun in Missouri and California's Great America. The company carries a large debt load from its Paramount Parks acquisitions a couple of years ago and has found the going difficult in the economic downturn.

IN PICTURES: Digging Out Of Debt In 8 Steps

Carrying A Heavy Load
Cedar Fair continues to carry about $1.7 billion in long-term debt, largely from its purchase of Paramount Parks. The company generated just under $1 billion in annual revenue in 2008 with $5.7 million in net income. It pays a dividend much like a REIT, which is currently yielding 9%, so at $1 per share annually, these payouts were $105 million last year.

Cedar Fair has retained Merrill Lynch & Co. to assist with possible asset sales, as CEO Dick Kinzel said the company is trying to sell Valley Fair and Worlds of Fun parks. Recently, Kinzel sold a large block of his own Cedar Fair stock to meet a margin call. He did this amid much negative commentary about the company's and stock's future prospects, due to the overhang of debt and aggressive expansion in the face of the severe recession. The amusement park business can't be much fun right now. (Find out where to turn when looking to invest in a tumultuous market. Read Industries That Thrive On Recession.)

No Walk In The Park
Cedar Fair is not alone in facing an uphill climb on the roller-coaster ride of the amusement park business. Six Flags (OTC:SIXF), which has been delisted from the New York Stock Exchange and is now a penny stock, has been losing money and is expected to continue doing so. The company said in a recent release that it will defer interest payments and may seek Chapter 11 bankruptcy protection. It had been acquiring small properties along the way and now owns 20 major parks, while Cedar Fair has 17 properties. Both of these companies are significant players in the industry. (Learn more in our answer to the common investment question, What are the differences between chapter 7 and chapter 11 bankruptcy?)

What About The Mouse?
Walt Disney Co.
(NYSE:DIS), in its recent Q2 earnings report, cited a 12% revenue decline in its theme parks and resorts division, down from $2.73 billion to $2.4 billion. Disney, of course, unlike Cedar Fair and Six Flags, is highly diversified with potent operations in several other entertainment segments.

Apart from the liquidity troubles of Six Flags and the debt load of Cedar Fair is the question of whether this summer season will see a much-needed rebound in park attendance across the United States. After all, as Cedar Fair's Dick Kinzel said, his company has a long history of operating through recessions and downturns. He might have added, however, that other once-thriving parks do, too. The problem may be that consumers have so many ways to split their entertainment dollars these days. Locally, movie theaters are doing a booming business, for example, with their relatively cheap ticket and close-to-home value.

Theaters Thriving
(NYSE:CNK), one robust national player, has been doing well, and prospects still look good for theaters. Revenue is rising, the stocks are jumping and another big summer season is projected with the kicker of 3-D revenue on top of everything else. Granted, 3-D may be gimmicky, but the movie theaters are turning over customers despite the wide availability of DVDs, home theaters and home rentals.

Other Competition For Recreational Spending
Other recreational attractions, such as local sporting events, can take potential theme park visitors away if choices for spending must be made. International Speedway (Nasdaq:ISCA), which owns several tracks that run NASCAR races including the Daytona Speedway and Talladega, has found a vertical integration formula for revenue and earnings that is still working despite some belt-tightening on the stock-car circuit. Additionally, you have the usual suspects of Major League Baseball with another competitive local family ticket in many major markets, along with such entertainment staples as World Wrestling Entertainment (NYSE:WWE). If parents don't feel like dragging the kids 30 or 50 miles to a regional amusement park and there's a wrestling event in town or even on pay-per-view, there's another profitable enterprise waiting to scoop up entertainment dollars.

For those still disposed to travel, a longer trip to one of Disney's mega-parks - a destination visit as well as a theme park trip - could enter the picture. If travel for its own sake is on the horizon, the Carnival Corp. (NYSE:CCL) cruise line and others loom to take dollars away from theme parks if the economy ticks up a little. The cruise industry has increasingly become a family industry in the last several years.

For Cedar Fair To Return To Fun...
Cedar Fair will have to do something to decrease its debt load and address concerns about that aggressive expansion, which it has seen as necessary to stay competitive in a highly contested industry. The company might also want to rethink its annual capital expenditures for new giant coasters. This doesn't seem to be a cost-effective way to reach more customers, or at least it's not filtering to the bottom line the way the company wants. This is a time to streamline operations, strengthen the balance sheet, and find and focus on what works best. This may mean hammering home the value of the admission ticket and the park experience along with its regional availability.

Down the road, Cedar Fair and other park operators will have to find new strategies to compete better with encroaching non-park entertainment events. If Cedar Fair has a good summer, it can look forward to more than survival, and maybe finally some fun again. We all need that.

If you thought investing and fun don't go together, think again. Find out more in Leisure Funds: Where Luxury And Fun Come To Make Money.

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