Cedar Fair: FUN with MLPs

02/24/2015 8:00 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Most MLPs are in the energy space; but Igor Greenwald, editor of MLP Profits, turns to a non-energy idea—an amusement park operator—that he considers a "safer roller coaster" than the currently volatile energy area.

Cedar Fair  Entertainment (FUN) operates 11 big regional amusement parks, alongside three water parks and five hotels parks. With lower oil prices, it’s a pretty good bet that more people than ever before will visit its parks next summer.

This is a business that doesn’t do well in recessions and the last one in 2008-09 left this unorthodox master limited partnership deep in debt, shorn of its distribution, and on the brink of private equity buyout at $11.50 a share, before cooler heads prevailed.

But amusement parks are money in the bank during periods of low unemployment, low energy prices, and improved consumer confidence. With the economy picking up, Cedar Fair’s nearly 6% current yield offers a welcome bit of diversification for investors feeling overexposed to energy.

The shareholder revolt in the wake of that failed buyout five years ago installed the current CEO, a well-regarded Disney veteran who used to run Disneyland.

Crippling debt has been paid down to a manageable 3.7x EBITDA and refinanced at a lower interest rate, leaving more for sprucing up attractions, hotels, and the distribution.

The payout, which totaled 55 cents in the first year after it was reinstated in late 2010, has since risen to the current record annual rate of $3 per unit.

The unit price has doubled in three years. Now the yield serves as the main attraction, consuming as it does more than 90% of Cedar Fair’s free cash flow.

The coming season should go better than the last, provided the weather proves a bit more cooperative. Higher prices are a certainty and record attendance a strong likelihood.

Cedar Fair’s distribution depends on the health of consumer spending, which is more robust than energy fundamentals at the moment.

Unless and until consumers are running scared once again, Cedar Fair is a boring, relatively stable, and perfectly decent yield worth riding. We’re adding FUN to the Aggressive Portfolio.

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