The word is out. Millennials are spending more on "experiences" and less on "things" than their parents. Whether it's because they're less materialistic, or because they like to brag about all the cool things they're doing on social media, is a matter of debate. What isn't debatable is that investors should be aware of this phenomenon, and invest accordingly.
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One "experience" stock is Cedar Fair, L.P. (NYSE: FUN), which owns 11 theme parks, three water parks, and five hotels throughout the United States and Canada. Its parks include Ohio's Cedar Point, Los Angeles' Knott's Berry Farm, and Virginia's Kings Dominion.
The company just reported a strong third quarter and raised its quarterly cash distribution to unitholders by 4%, sending shares up in the subsequent days. Let's dig into the results.
What happened in the third quarter?
The third quarter, being summer, is the company's busiest, accounting for over half the company's annual revenues. Revenue came in a $653 million in the quarter, an increase of 1% over 2016, with a 1% increase in same-park traffic and an 1% increase in average ticket. However, the company's adjusted EBITDA -- often the preferred metric by which investors judge real estate-oriented stocks such as Cedar Fair -- declined, though less than 1%.
The decline in adjusted EBITDA was due to a few things. One, the company closed one of its "non-core" water parks in September 2016, so while that park was included in last year's Q3 numbers, it was not in this year's. Two, the company experienced some bad weather in the quarter, specifically during Labor Day in the Midwest, which is a big weekend for the company. Three, labor inflation played a role, as did the company's special Canada Independence Day events, which called for adding staffing.
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This may have disappointed some investors, as the company's target is for at least 4% annual EBITDA growth. Nevertheless, investors apparently gave the company the benefit of the doubt after hearing the company's growth plans. Management displayed confidence as well, increasing its quarterly payout 4% to $0.89, for a forward yield of 5.3%.
How Cedar Fair can grow the fun
Despite the year-over-year decline in the third quarter, the company is guiding for full-year adjusted EBITDA to grow to $480 million to $490 million, from $481.2 million last year. An increase will come from an expanded Winterfest at five of the company's parks, up from just two last year. The company also hopes the second season of Winterfest at California's Great America, which the company only started in 2016, will grow in its second year.
In addition, the company plans to build four new state-of-the-art roller coasters in 2018: Steel Vengeance at Cedar Point, Hangtime at Knott's Berry Farm, Railblazer at California's Great America, and Twisted Timbers at King's Dominion. These are part of the company's plan to spend 10% of annual revenues on new attractions every year.
Beyond these in-park investments, the company is looking to build new features on land adjacent to its parks, with the aim of increasing incremental revenue. For instance, this year the company will expand its Hotel Breakers at Cedar Point. The company is also expanding its food and beverages to higher-quality and differentiated offerings. Food and beverage were a bright spot last quarter, growing by nearly $3 million, while admissions revenue slightly declined.
Solid results and a solid company
Despite this year's lumpy results, Cedar Fair has been a consistent performer over the long term, achieving an average 5.3% adjusted EBITDA growth between 2012 and 2016. In addition, the company's leverage ratio stands at just under 3.5 times debt-to-EBITDA, which is lower than peers Six Flags Entertainment at 3.7 SeaWorld at 6.1.
That means the company has not only delivered consistent growth, but is doing it safely. With a dividend yield over 5%, moderate growth, and a better balance sheet than peers, those seeking a safe yield in the experience economy may wish to buy a ticket to ride Cedar Fair's stock.
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