A Fun Dividend to Invest In
Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Shares of Cedar Fair (NYSE: FUN) have been on quite a roller coaster ride this year. Since new CEO, Matthew Ouimet took over in January, the share priced made its initial ascent only to take a significant drop in May, before climbing higher still, reaching a peak after its latest earnings release where the company actually missed analysts’ estimates by a huge $0.28 per share, and now falling back down post-election and post-season.
The news that drove share prices up in the company’s latest earnings was the announcement of a higher than expected dividend increase. In Cedar Fair’s latest conference call, the company announced a whopping 56% increase on its cash distribution to $2.50 per unit for 2013. That’s a forward yield of 7.4% at today’s price. The company expects the dividend not only to be sustainable, but also to grow in line with the business.
Similarly, Six Flags (NYSE: SIX) announced a quarterly dividend increase to $0.90 per share. That’s a 6.3% yield at today’s price. Between the two theme park operators, I believe Cedar Fair is a better investment. From a valuation standpoint, Cedar Fair trades for a P/E of 16.7 compared to 28.9 for Six Flags. Additionally, Cedar Fair operates more effectively than Six Flags with significantly higher ROE – 58.4% compared to 10%. Furthermore, the operating margin at Cedar Fair is over 5% greater than Six Flags.
The distribution represents about $140 million of total cash. In order to maintain such a level, the company will need to maintain its cash flows. The company has not released guidance for 2013, but its adjusted EBITDA guidance for 2012 is $385 million to $395 million. It estimates capital expenditures in 2013 of $90 million to $100 million, interest of $100 million, and taxes of $10 million. That leaves $175 million to $195 million to distribute the $140 million to shareholders and retain earnings for future growth or to pay down its high level of debt.
Debt remains a problem for the company. However, it is taking measures to control debt levels and improve its credit position. Improved cash flow this year allowed the company to pay down $25 million in debt. Cedar Fair anticipates additional debt reduction going forward. Moreover, the company has no debt obligations due until 2015.
I believe it’s likely the company will continue to grow further in 2013. The company’s FUNforward strategy outlined at the beginning of the year has shown a lot of successes that should translate into higher revenues next season. The strategy involves implementing new initiatives across the company’s portfolio of theme parks.
First, dynamic pricing and advanced purchases – the company began selling admission tickets and season passes online this year. The new system provides customers to pay for season passes in installments, and makes it easier to up sell customers on amenities such as pre-paid parking and meals. As a result, admission revenue per capita is up about 3% year-to-date and in-park per capita spending is up nearly 6%.
Second, premium product offerings – Cedar Fair is expanding and introducing new premium experience offerings such as Fast Lane. Fast Lane allows patrons to ride more rides and spend less time waiting in line. Additionally, programs such as Luminosity and special events such as the Huant and Halloweekends among other premium offerings created urgency and increased the number of guests visiting Cedar Fair theme parks this year.
Third, capital and expense productivity – in order for the company to continue drawing repeat visitors, it needs to invest in new rides. Last month, Cedar Fair released a run-down of all its new expansion plans. Plans include a new record-setting roller coaster to Cedar Point called GateKeeper, an Old West themed coaster at California’s Great America, an expanded Planet Snoopy at Kings Dominion in Virginia, and six new slides at Oceans of Fun in Kansas City.
Fourth, improved consumer messaging and relationship coordination – a focus on updating the company’s marketing and sales strategy. Cedar Fair hired independent advertising agency Cramer-Krasselt to create the new Thrills Connect program – a combination of radio, television, search, and online advertising. The company plans to expand the program next year, focusing on the mediums that are most effective.
Lastly, strategic alliances – recently, the company announced alliances with Coca-Cola (NYSE: KO) and the ICEE company to provide beverages at Cedar Fair theme parks. The consolidation of its beverage relationships to provide Coca-Cola soft drinks exclusively will improve cost efficiencies for Cedar Fair. There is opportunity for the company to continue building alliances with food and toy companies in the future.
The planned distribution increase looks safe for the next couple years. The company’s debt situation is alleviated by the reduction in debt obligations this year, and no further obligation until 2015. However, with a debt to equity ratio of 8.23, the investment may be a bit risky for some. Free cash flow should be able to cover plans for park expansions as well as the increased distribution amount, while providing the company further room to pay down that large amount of debt.
I believe the company has the opportunity to continue improving its top line through the FUNforward initiatives. Pre-sales for 2013 season passes are ahead of where they were at this time last year, implying the fiscal cliff is not slowing down growth and the new marketing and e-commerce system are working. New rides and attractions along with premium experiences ought to improve repeat visitor numbers. Finally, strategic alliances will help keep costs down to improve the bottom line.
At this price you’re getting a 7.4% annual yield even if the stock does nothing for the next year. However, since Ouimet took over as CEO in January, the stock has climbed an astounding 55%. I believe Ouimet has the ability to execute the FUNforward growth strategy, and actually take the stock price and distribution rate higher.
adamlevy has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend The Coca-Cola Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!