You Must Be This Tall to Invest in Cedar Fair

There are two ways to spot heartbreak at an amusement park. The first is to hang by a thrill ride's entrance, absorbing the gut-wrenching frustration of kids who discover they aren't tall enough to go on the ride. They'll try to tiptoe against the height stick. They'll pad their shoes with socks. My nephew even used to go in thick-heeled boots. Park attendants often see through these tactics.

"Sorry, kid," they'll say. "Maybe next year."

The other way to spot heartbreak is to see how regional park operator Cedar Fair's (NYSE: FUN  ) plan for national domination has come undone. It's acquisition of Geauga Lake three years ago was a failure. Four operating seasons later, the park couldn't deliver positive cash flow. It is now closing down everything but the small waterpark, shuttling rides to its other parks, and is exploring the sale of 500 acres of now available property.

Last year's purchase of the Paramount Parks chain from CBS (NYSE: CBS  ) is coming along noticeably better, but that's not saying much. Two operating seasons later, the deal is still not cash flow-accretive. Boosting season pass prices and slashing discounts and complimentary tickets may be sound fiscal moves, but attendance has fallen as a result of the tightening. The company believes it's on track to turn that around in 2008, but it's starting to feel like another acquisitive challenge for the company.

"Sorry, investor," Cedar Fair says. "Maybe next year."

You must be this tall to report earnings
The company's third-quarter report is uninspiring. (Last quarter's report wasn't much to celebrate, either.) Revenues rose by 5% to $567.5 million, but that was padded by an extra operating week during the period. Absent the extra days, the top line would have inched just 2% higher. Slower turnstile clicks were more than offset by higher per-capita spending.

Earnings fell to $0.98 a unit for the quarter, after earning $2.42 per unit a year earlier. But it's not quite that bleak. Non-cash charges included throwing the towel in on most of Geauga Lake, as well as a tax provision that will be reversed during the current quarter. Still, earnings would have clocked in a bit lower even if you removed those two significant writedowns.

Cedar Fair points to improvement in adjusted EBITDA, but it only amounts to a gain of 2%. The company didn't spell out how much of that was attributable to the period's extra operating days during yesterday's conference call. Either way, if you go on an apples-to-apples basis and stack it up against the 5% uptick on the top line, you find that EBITDA margins contracted for the quarter.

The company had a great crutch last year. The Paramount Parks deal closed after the season started. Focus was going to be a problem. What's the story this time?

Rollercoaster times for the rollercoaster industry
By the end of this week, we'll have a good snapshot of the industry. Disney (NYSE: DIS  ) and Six Flags (NYSE: SIX  ) will report. The Six Flags report will be the better fit, as both companies are regional amusement park operators. Disney marches to a mouse-eared drummer, and its global appeal bodes well as the weaker dollar finds foreigners flocking to Disney's coastal bookends for what will amount to cheap vacations by their standards.

Cedar Fair and Six Flags don't have the same luxury. As Cedar Fair noted during yesterday's call, 75% of their visitors are repeat visitors. Cedar Fair isn't affected by just the stagnant economies of Michigan and Ohio. It also has to battle against broader setbacks like higher fuel prices and the subprime meltdown.

Getting away to the local amusement park isn't exactly an option when you're several months delinquent on that bubbling variable rate mortgage.

You see that affecting several leisure industries. Remember the "can't miss" summer blockbusters that hit the multiplex a few months ago? Well, Carmike Cinemas (Nasdaq: CKEC  ) has seen its revenues climb just 1% higher through the first nine months of the year. Great Wolf Resorts (Nasdaq: WOLF  ) posted respectable summer quarter numbers this week, but it also singled out the weakness at its Michigan and Ohio indoor waterpark lodges.

Taking the bear by the horns
If there's one thing Cedar Fair should be commended on, it's that it's not backing down from the calamity. A lesser company would have slashed capital expenditures to keep nervous investors from worrying that the juicy 8.2% yield would be cut as the company combats its $1.7 billion mountain of debt.

That's not happening here. Cedar Fair is budgeting $88 million to improve its parks next year, more than the $83 million that it spent last year. The move is surprising, because the ambitious cap ex is also accounting for the relocation of most of the Geauga Lake rides that will cost the company half as much as if they were new installations.

Sure, some of the parks may feel insulted to get hand-me-downs from a flawed sister attraction, but most of the locals won't know that. It will be new things to experience on the park map. It's the kind of elixir that can spur season pass sales, get the turnstiles clicking in the right direction, and finally justify the Paramount Parks purchase that egged its balance sheet.

It's at that point when Cedar Fair will be able to stand proud and tall before the height stick.

"Go ahead, kid," the market will say. "Enjoy the ride."

Lower the safety bar on this Foolishness:


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