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Published: August 23, 2010
One of the prevailing theories about the economy is that it
is consumer-driven, a postulation I happen to agree with, given
that consumer spending accounts for 70% of all economic
activity.
Part of the reason this recession began is because credit
tightened severely when the real estate crisis hit, and a lot of
wealth vanished very quickly. And when people began losing their
homes, they stopped spending money. Thanks to the credit
situation, many simply couldn't borrow any more either, so that
meant that consumer spending would be a drag on the whole
economy.
There are two types of consumer-oriented businesses. One is
called "consumer
staples," which are businesses that sell things people
pretty much can't live without. The other is called "consumer
discretionary," which are all the things we treat ourselves to,
but don't need to survive. In a recession, it's the
discretionary expenditures that get cut first. That means
businesses that deal in leisure and luxury items get smoked --
and their stock prices along with it.
One company that certainly got smoked was Cedar Fair L.P.
(NYSE: FUN), which owns 11 theme parks in the United States
and Canada. Attendance fell -8% in 2009 from 2008, which cut
revenues by $80 million. The result was an adjusted EBITDA down
-17%, from $356 million to $300 million. (Adjusted EBITDA is
really just
operating income -- the real profit the company made. In
Cedar Fair's case, a host of non-recurring charges and non-cash
charges skews its
net income results to the point where the
bottom line number becomes meaningless.)
The other problem was that the company was saddled with $1.8
billion in debt. Even though the average interest rate was about
6.5%, the payments were sucking $125 million off the company
each year. Worse, Cedar Fair was teetering on the edge of debt
covenant violations that would have thrown the company into
default.
Investors hated all this bad news and sold
the stock off from $25 to $6.
But the sellers missed the bigger picture, for while the company
did get smoked, it was generating an operating profit and good
cash flow. The company just needed two things:
recapitalization and improved consumer spending.
Instead, management decided to approach Apollo Global
Management, a private equity firm, for a
buyout. Apollo likely saw a value play that it could take
out for much less than
intrinsic value and made a buyout offer of $11.50 a share --
a +28% premium over the share price at the time.
But shareholders turned them down flat.
So the company went back to the drawing board, and three things
have happened that make Cedar Fair a compelling opportunity.
First, consumer spending as a whole improved +3.7% in Q1 and
+1.6% in Q2. Cedar Fair's park attendance was up +7.5% for the
first half of the year compared to last year, leading to a +4%
increase in revenue.
Second, the company refinanced its debt. Although interest
payments are actually a little higher than before, the key
changes are that the maturity dates have been pushed out to
2016, and the debt covenants are less restrictive, so the
company has bought the time it needs for consumer spending to
improve.
Third, a hedge fund run by one of uber-investor Carl Icahn's
former partners, Geoffrey Raynor, took an 18% stake in Cedar
Fair prior to the Apollo offer. This highly experienced investor
obviously sees the long-term value in Cedar Fair as well.
Action to Take --> I think
the time is right to buy Cedar Fair.
Raynor is no dummy. He obviously thinks there are strong returns
to be had by rebuffing Apollo's offer. In addition, the Apollo
offer of $11.50 a share puts a fairly solid floor on the stock
price.
Barring a total collapse in attendance, the company should meet
all debt covenants. The only caution flag for investors to stay
on top of is park attendance, which may be telegraphed by a
decrease in consumer spending. Otherwise, I think the stock can
return to its old highs, which is +200% above current prices.
-- Frederick Steier
Contributor
StreetAuthority |
