Does Cedar Fair Stock Remain A Good Bet Despite 150% Surge?

We believe Cedar Fair stock (NYSE: FUN) is a good opportunity at the moment. FUN stock trades close to $47 currently and is, in fact, still down 16% since the beginning of 2020 when it traded at around $55. The stock was at $54 in February 2020 – just before the coronavirus pandemic hit the world – and is currently still 14% below that level as well. FUN stock has recovered over 150% from its March 2020 level of $18, compared to the S&P 500 which gained 87% from its March 2020 lows. The stock was able to beat the market as the lifting of lockdowns and opening up of the economy is leading to a gradual restarting of Cedar Fair’s theme parks which have been shut since March 2020 due to the pandemic. Also, with the US government announcing a string of measures to keep businesses afloat and successful vaccine rollout, investor sentiment improved over recent months. The company’s high debt burden remains a concern, but in the absence of another stringent lockdown and the company deciding to invest $100 million in theme parks in 2021, increasing footfall will drive revenue and earnings growth in the coming quarters. FUN stock is likely to move further up by more than 20%. Our conclusion is based on our comparative analysis of Cedar Fair stock performance during the current financial crisis with that during the 2008 recession in our interactive dashboard.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, 2020, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• Since 3/24/2020: S&P 500 recovers 87% from the lows seen on Mar 23, 2020, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how FUN stock and the broader market fared during the 2007-08 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

FUN and S&P 500 Performance Over 2007-08 Financial Crisis

We see FUN stock declined from levels of around $24 in September 2007 (pre-crisis peak) to levels of around $8 in March 2009 (as the markets bottomed out), implying FUN stock lost 68% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of over $11 in early 2010, rising by 49% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied to levels of 1,124, rising by about 48% between March 2009 and January 2010.

FUN Fundamentals Over Recent Years

FUN revenues increased from $1.3 billion in 2017 to $1.5 billion in 2019, primarily due to higher footfalls and the acquisition of Schlitterbahn parks. Earnings have remained volatile but have largely been over $3.00/share in recent years. However, the company’s revenues crashed 87% y-o-y in FY 2020, while the company reported heavy losses of $10.45/share during this time, with financials being severely impacted due to shutdown of its facilities during the ongoing pandemic.

Does FUN Have Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

FUN’s total debt increased from $1.7 billion in 2017 to $3 billion in 2020, while its total cash increased from around $166 million to $377 million over the same period. The concern is that the company reported a cash outflow of $417 million from operations in the last twelve months. Thus, high debt burden and negative cash from operations are near term risks that the company faces.

Conclusion

Phases of Covid-19 Crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• Since late 2020: Weak quarterly results, but continued improvement in demand and progress with vaccine development buoy market sentiment

Helped by the recent decline in the number of new Covid-19 cases in the U.S., we expect continued improvement in demand to buoy market expectations. As investors focus their attention on expected 2021 results, we believe Cedar Fair stock has the potential for strong gains of over 20% once fears surrounding the Covid outbreak are put to rest.

While FUN stock may have moved, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Hasbro vs World Wrestling Entertainment shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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