Cedar Fair Stock Doubles But Has Not Peaked Yet

FUN: Cedar Fair logo
FUN
Cedar Fair

Despite an eye-popping 115% rise since the March lows of this year, at the current price of $28 per share, we believe Cedar Fair’s stock (NYSE: FUN) still has upside potential. Cedar Fair’s stock has rallied from $13 to $28 off the recent bottom compared to the S&P 500 which has increased around 39% from its recent lows. The stock was able to beat the market as the gradual lifting of lock down and opening up of the economy is leading to the restarting of Cedar Fair’s parks which have been shut since March. Also, with the US government announcing a string of measures to keep businesses afloat, investor sentiment improved over recent weeks.

With the stock price still at half the levels at which it was at the end of 2017 and 2019, we think it still has potential to rise further despite a strong recovery over the last three months. Our dashboard What Factors Drove -49% Change In Cedar Fair Stock Between 2017 And Now? provides the key numbers behind our thinking.

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Comparing stock price levels of 2017 and 2019, there is only a marginal decline in price. This is despite revenue increasing by 11.6% during these two years, mainly due to the acquisition of Schlitterbahn parks in July 2019. This was offset by a sharp decline in margins from 16.3% in 2017 to 9.4% in 2018, mainly due to base effect (2017 margin was unusually high due to tax benefits received) and foreign exchange losses coupled with change in fair value of derivative instruments in 2018. Margins recovered to 11.7% in 2019. However, during this period, the P/E multiple in fact went up because the stock remained high despite drop in EPS, as the investors knew that volatility in margins was due to non-recurring factors and not a deterioration in fundamentals.

The P/E multiple increased from about 15x in 2017 to 18x in 2019. However, the P/E multiple crashed in 2020 and currently stands close to 9x as the stock price dropped significantly following the outbreak of coronavirus. We believe that the company’s P/E multiple has the potential to go back close to its historical level, leading to a rise in stock price post the coronavirus crisis.

What’s the likely trigger for an upside?

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. The ongoing lock down of major cities and economic slowdown has adversely affected the company’s theme and amusement parks business which has virtually seen idle rides and empty properties due to a complete shutdown. Theme parks and merchandise & food (which depends on footfalls at theme parks) comprises 100% of the company’s revenues. Thus, the lockdown is having an adverse impact on the entire business of Cedar Fair. This compares unfavorably with rival Disney, as only 38% of Disney’s revenues are contributed by parks and resorts. Find out how Disney’s stock has moved over recent times.

Cedar Fair’s Q1 2020 saw a 20% drop in revenues on a year-on-year basis. However, Q1 2019 did not factor the impact of acquisitions during mid-2019. Thus, this comparison does not reflect the entire picture. Also, Q1 2020 saw only a partial impact of the current crisis as the shutdown of facilities began only in March. In fact, Cedar’s Q2 results are likely to reflect the gravity of the situation with a sharper deterioration in revenue and margin performance driven by loss of attendance due to suspension of operations at its parks and resorts.

However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. compared to the rate seen in April-May to bolster market expectations. Following the Fed stimulus — which helped to set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results.

With the lifting of the lock downs, and as economy opens up, the company’s parks are gradually restarting operations. Worlds of Fun in Kansas City reopened on 22nd June and the company has announced the schedule of the gradual reopening of other facilities through the month of July. This has made investors optimistic about the company’s recovery beginning Q3 and Q4 2020. The news of recent surge in Covid-positive cases in the US could prove to be a hiccup on the way to recovery in FUN’s stock, especially if the lockdowns are re-imposed, in which case the stock could again decline. However, as investors’ focus has shifted to 2021, in the absence of another lock down and if there are signs of abatement of the crisis during Q3 2020, Cedar Fair’s stock could see a sharp rise from its current level.

While Cedar Fair’s stock price could rise sharply, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

For further insight in to the theme parks segment, see how SeaWorld Entertainment and Six Flags Entertainment compare with each other.

 

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