What happened
Shares of Cedar Fair (FUN +0.00%) rose a whopping 57.3% in April, according to data provided by S&P Global Market Intelligence. This comes on the heels of a 60% drop in March. The disparate monthly moves seem fitting for a company with roller coasters in its amusement parks, although it's surely not amusing for shareholders who are still down over 50% year to date.
Cedar Fair's stock obviously dropped in March because of the COVID-19 pandemic. The health crisis is disrupting any business that relies on large crowds. Now, April's gains are attributable to fresh liquidity, investor hopes for a reopening, and a broad market rally.
Image source: Cedar Fair.
So what
To be clear, COVID-19 isn't just a minor inconvenience for Cedar Fair. Not only has the company halted its quarterly distribution and withdrawn guidance for 2020, it's also withdrawn long-term guidance for 2024. Originally, it was targeting $600 million in adjusted EBITDA by then.
Why would a company withdraw guidance that far out? Cedar Fair is being realistic with the ongoing economic impact of the coronavirus. Currently, amusement parks can't open and generate revenue. The company's costs, however, continue at a pace of $25 million to $30 million per month even after spending cuts. That rising debt load will take time to pay down, affecting the company's profitability in coming years.
On the bright side, Cedar Fair got a $1 billion infusion of cash by selling secured senior notes. These notes aren't due until 2025 and provide the company with ample liquidity during this season of being shut down.
Cedar Fair's stock rose in April with the overall market rally. But it also rose as the company addressed liquidity concerns and as investors gained confidence that parks won't be shut down too much longer. Some states have already begun lifting stay-at-home restrictions.
Now what
Even after April's gains, Cedar Fair's stock hasn't been this low since 2012. It looks like a value stock, trading under nine times trailing earnings and with its trailing quarterly distribution yielding 13%. If normal business returns, profits come back, and quarterly distributions resume, then those who invest today could look pretty smart.
But investors need to take an extraordinarily long view with Cedar Fair. Remember that the company withdrew its own 2024 guidance, suggesting multiyear uncertainty. Therefore, investors would be prudent to be prepared for challenges in the short and medium terms. My guess is that even after reopening, crowds will initially be smaller than those the company is used to. So it may take years for profitability and payouts to reach pre-pandemic levels.
