Shares of amusement park operator Cedar Fair, LP (NYSE:FUN) were punished by investors last week on the news of its third quarter earnings and the announced likely suspension of its dividend beginning next year. While the company saw its profits rise on lower revenue, its once-generous dividend distribution has been prized by income investors for many years, so the news of dropping the dividend caused many investors to flee the stock. Cedar Fair stock had been trading at $9.52, but fell to $6.99 on the announcement.
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How Bad is This News?
With the steep sell-off of Cedar Fair stock, many on The Street were quick to slam the stock. Jim Cramer called it a "monster bad stock," and added that it was "too low to sell right now." The stock for the last decade until the 2008 stock market collapse had usually traded in the $17-35 range, while its distribution ranged from $1.40 per share to $1.92, so you can see how attractive this hefty payout was to investors. The dividend stoppage is a dramatic change for the amusement park operator, which did not amuse investors.
Behind the Cedar Fair Numbers
Cedar Fair, which operates 18 amusement parks across the country, including its home park of Cedar Point in Sandusky, Ohio, the second oldest park in the nation after Coney Island, (and a once-favorite vacation place of legendary investor Peter Lynch) earned $1.92 per share for the third quarter or $107.6 million, versus $1.65 per share, or $91.5 million, on revenues of $519.9 this quarter compared to $540.3 last year's same quarter. Nine months' results showed revenue of $810.5 million, with net income $61.7 million, $1.10 a share, down from last year's revenue of $877 million, with net income $62.5 million or $1.12 per share for the same period. The company's operations are mainly seasonal, strongest in the summer, so the revenue and earnings picture reflects this.
Amusements Parks Not Amusing Right Now
If you've followed any of our articles on Cedar Fair and the amusement park business, you're aware it has been a tough year for parks in the recent economy. Even Walt Disney Co.(NYSE:DIS), the undisputed leader in the field, has been running behind in revenue and profits this year. Cedar Fair's problems were compounded by its purchase of the Paramount Parks in 2006, and the company still has that overhang. This purchase required taking on a heavy debt load, which as of June was still more than $1.7 billion. Although since reduced some, the suspension of the dividend will be so that Cedar Fair can apply much more cash to debt repayment.
With Six Flags filing for bankruptcy earlier this year, it's easy to see how park operators have been running into the uphill side of the financial roller coaster. Waterpark operator Great Wolf Resorts (Nasdaq:WOLF) has found the going hard, too. In this climate, however, Blackstone Group (NYSE:BX) has purchased the Anheuser Busch In Bev (NYSE:BUD) amusement parks for $2.3 billion in cash plus $400 million for other considerations. Blackstone is either bold or foolish, but it is certainly a bullish play on the park industry. Does it have any bearing on Cedar Fair?
The Bottom Line: Cedar Fair's Critical Year
Cedar Fair has been traditionally well managed and the numbers, apart from the dividend drama, are not bad considering the horrible recent economy. In a brilliant piece on the fundamental value of Cedar Fair, Seeking Alpha's Paul Price details how suspending the dividend to pay off debt is the right move, how the stock price being smashed is the prelude to value/growth investors rather than income investors taking a serious look at Cedar Fair. With a ten-year median PE of roughly 16, this year's price multiple for the stock will be somewhere between five and six, so even with recessionary numbers, Cedar Fair may become a bargain. It must continue to work down its debt, but with a better economy and future earnings increases, the stock may one day not only amuse, but delight, investors. (To learn more, see Fundamental Analysis For Traders.)
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