Astraea.Earth
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Astraea.Earth

Dave Yoken

Nov 2, 2020

8 min read

UPDATE: Cedar Fair Entertainment Q3 2020 Earnings Analysis Revisited

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FEB 2021 UPDATE:

The present stock market volatility has us thinking deeply about the power of geospatial data to unearth misalignments between asset prices and ground conditions.

As part of this investigation, we’re reflecting on our original Pulse product: Pulse of the Park.

Last fall, we built a monitoring pipeline to track activity at an underperforming mid-market theme park operator: Cedar Fair Entertainment (traded on the NYSE as FUN). We published a report just before Earnings, which successfully predicted that FUN would beat estimates for Q3 revenue. Following earnings, Cedar Fair’s stock price enjoyed a breakout from its summer lows, with the 20-day moving average crossing the 50-day moving average and sustaining that rise through to today.

Our modeling revealed that while attendance in Q3 was nowhere near 100% of where it was before Covid, it was stronger than Q2 was, relative to 2019.

3.8x stronger than Q2, to be specific.

Cedar Fair climbed over following Q3 2020 Earnings
Excerpt from Nov 1st Report

While the run-up in the stock price was impressive, some of the wind in FUN’s sails was surely macro-driven. Biden closed out the election and major vaccine announcements were made during this time, which buoyed theme parks.

So we went back and traced our attendance predictions to the specific text of Cedar Fair’s earnings release. As it turns out, our activity predictions quite neatly matched the attendance levels disclosed by the company a few days later. We were excited by this finding.

We continue to explore the potential to deliver rapid signal across various channels of the asset management universe, including automotive production, manufacturing, and real estate.

Reach out to me at dyoken@astraea.io if you’re interested in learning more!

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Original article Nov 2 2020

COVID-19 has broken the traditional paradigm of financial analysis, introducing ambiguity into expectations of company performance. Savvy investors are increasingly seeking blades to slice through that uncertainty. As a result of this demand, “alternative data” — non-financial data used in investment decisions — is expected to grow at a 40+% CAGR over the next 7 years.

A growing category for alternative data is geospatial intelligence.

In partnership with an alternative data marketplace, we used Astraea’s EarthAI platform to build a dataset monitoring commercial activity at theme parks owned by Cedar Fair Entertainment (NYSE: FUN).

In the Zoom era, companies that derive revenue from non-physical, separated experiences (e.g. Nvidia, FedEx, Etsy) have outperformed companies that derive revenue from physical, crowd-centric experiences (e.g. travel and leisure). Theme parks, which depend on discretionary income, consumer confidence, and social intimacy, have been particularly hard-hit by the COVID-19 crisis.

To analyze the extent of this impact, we derived attendance at Cedar Fair parks from satellite imagery and anonymized mobile signals. We dove deep into financials to understand the criticality of the company’s park attendance numbers over the coming quarters.

See our abridged analysis below — visit www.PulseofthePark.com for the full data.

“It’s only when the tide goes out that you learn who’s been swimming naked.” — Warren Buffet

Summary

Mobile and satellite data suggest that Cedar Fair fared better in Q3 than Q2 2020. Based on these data, our Q3 2020 revenue target for Cedar Fair is $101M.

Facing negative EBITDA for 2020, the company will likely have to raise debt again in 2021. Without a rebound in park traffic, interest rates will continue climbing toward financial distress.

COVID-19 lockdowns compounded Cedar Fair’s already perilous financial condition. In October 2020 the company issued $300M in new debt at 150bps+ typical levels.

Since 2012, Cedar Fair (FUN) has delivered substantial returns for its unitholders, through hefty dividend payments and resultant share price appreciation. Just as its parks were preparing for the 2020 season, however, the “COVID-19 crash” erased most of those stock price gains. Park closures over the summer meant lost revenues that will mostly not be recovered. We see these factors compounding an already perilous financial predicament for Cedar Fair, which has levered up substantially in recent years.

Since 2012 appreciation in FUN’s stock price has mirrored steadily-climbing dividend payments.
Since 2012 appreciation in FUN’s stock price has mirrored steadily-climbing dividend payments.

Investors must assess whether, and how quickly, FUN will regain its financial footing.

Creditors will require timely payment and fulfillment of agreed-upon covenants. Unitholders are anxious for dividend distributions to resume.

Our multi-source intelligence model leverages mobile data and satellite imagery to provide objective, physical-based insights into the performance of the enterprise.

The Road to Today

Cedar Fair Entertainment is organized as a Master Limited Partnership, a favorable designation that allows Cedar Fair to avoid paying federal or state tax at the corporate level. Partners in this group (i.e. anyone that buys a share or “unit” of Cedar Fair ownership) own an interest in and expect to receive quarterly distributions from the company.

Since 2012, the company has demonstrated a commitment to rewarding its unitholders with steadily-increasing dividend payouts. In three of the last four years, dividend payouts exceeded Net Income for the company.

In 3 of the last 4 years Distributions have exceeded Net Income
In 3 of the last 4 years Distributions have exceeded Net Income

Doubling the Debt

To maintain MLP status, a company must generate at least 90% of its income from qualifying activities, including those related to real estate. Cedar Fair meets this requirement through its ownership of almost all of the real estate associated with its parks.

The MLP structure will challenge Cedar Fair’s ability to raise liquidity.

In a downturn, this characteristic of the entity’s governing principles inhibits the company’s ability to raise funds by liquidating these assets, which combined constitute over half of the company’s total assets. This will make it much more difficult for the company to meet its obligations amid the COVID-19 downturn.

In recent years, rising distributions coincided with an expansion of the company’s balance sheet. The company has issued close to $2.5B in debt since 2014, as Net Long Term Debt has climbed from $1.43B in 2016 to $2.36B in 2020. On October 1st 2020, the company priced $300M of senior unsecured notes at 6.50%, 161 basis points above the weighted average interest rate on the rest of its debt.

Cedar Fair raised $300M at 150bps+ above average in order to meet near-term obligations.

Notable 2019 outlays included the acquisition of Schlitterbahn Waterparks for $258M and the purchase of land at the Great America park for $150M. The combined acquisition costs for these assets, which are now performing at a fraction of their expected utilization, required most of the proceeds from the 2019 debt issuance. The company has thus had to issue more debt to continue operating. With revenues severely diminished, significant additional debt issuance may be required in 2021, likely at a rate of 6.500% or higher.

Debt continues to grow as part of Cedar Fair’s balance sheet.

Building on those multi-year trends, Cedar Fair may soon face a reckoning with its creditors. Per the below excerpt from the 2019 Annual Report, Cedar Fair has a covenant obligation to maintain a Debt-to-EBITDA Ratio of 5.5 or less. As shown above, Cedar Fair has been steadily climbing toward that level for years (4.11 on Dec 31, 2019). That was before COVID-19 struck the economy.

Cedar Fair’s 2017 Sr Unsecured Notes require the company to maintain a Consolidated Leverage Ratio of 5.5x

Pulse of the Park: Multi-source Geospatial Intelligence

Will FUN regain its footing in time to meet its growing obligations?

Geospatial intelligence provides a unique means of answering this question. Traditional, retrospective methods of financial analysis require an assumption of extrapolation — an unreliable approach in the present epoch of unprecedented uncertainty.

Geospatial intelligence provides a physical measurement from the ground, a “pulse” taken steadily from each park throughout the season, so investors can act on near-real-time information.

One effective mode of geospatial intelligence is anonymized mobile phone signals. Analyzing activity inside the park gates illuminates the COVID-19 shutdown. A few parks have managed to remain open and have exhibited normal week-to-week seasonality, but the majority of the parks have had minimal activity — likely maintenance crews and other employees taking advantage of the downtime to clean up the park.

Most of Cedar Fair’s parks show little to no activity.
Three of Cedar Fair’s parks are open exhibiting normal seasonality
The Pulse observed at three parks exhibits consumers’ willingness to attend open attractions.

Another way to capture physical measurements, and the resultant insights, is through satellite imagery. This data provides a complementary signal to mobile-derived insight, as each offsets bias in the other. We analyzed images taken close-to-daily across Cedar Fair’s parks through the 2019 season and the 2020 season to date. For weekly readings of Cedar Fair attendance in Q2 and Q3 2019 and 2020, head to Pulse of the Park and download our FREE whitepaper.

So what does this mean?

In the shadow of impending financial distress, these findings present a glimpse of hope for Cedar Fair. While the drop-in attendance is significant, Q3 2020 outperformed Q2 2020 on a relative basis as restrictions eased and Cedar Fair’s parks opened. Based on the Pulses observed from mobile and satellite, our Q3 2020 revenue target for Cedar Fair is $101M.

We predict $101M in revenue for FUN in Q3 2020.

This will translate to negative EBITDA for a second straight quarter and for the year. With extensive fixed costs, a mounting debt burden, and a potential default looming, Cedar Fair may soon face a stock price depreciation as investors grow weary of anemic, or zero, distributions.

The company’s ability to finance operations through debt will depend on park attendance in Q4 2020 through 2021.

Others in the industry may begin circling, as FUN becomes an attractive target for investors or acquisitive competitors, including Six Flags, who made an unsuccessful $4B bid for FUN in 2019. The coming months will determine Cedar Fair’s fate. Savvy unitholders will mind carefully the progress made toward bringing back the FUN.

Disclosure: We do not hold a position in FUN. We have no business relationship with FUN. We are not receiving compensation for making a specific recommendation in our analysis. This report is for informational purposes only. Past performance is not necessarily indicative of future results. Securities, financial instruments, or strategies mentioned herein may not be suitable for all investors and this material does not take into account an investor’s particular investment objectives, situation, or needs. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.

Pulse of the Park

Pulse of the Park provides a near-real-time data feed tracking commercial activity at theme parks, providing long/short managers with a source of information and macro funds with a signal of consumer confidence. Multiple years of back testing data are available, and delivery options include .csv, .json, or API.

Cedar Fair (FUN) is available now. Additional coverage of the sector, including Six Flags (SIX), the Walt Disney Company (DIS), and Sea World (SEAS) coming soon!

If interested, please visit www.PulseofthePark.com and/or contact Dave Yoken at Dave@Astraea.io. FISD Tearsheet available.