As long as COVID-19 is not fully contained, companies like Cedar Fair (FUN) will continue to bleed cash on a daily basis. The company already burns $30 to $40 million per month and it constantly needs to raise new debt in order to stay afloat. As a result, in Q2 Cedar Fair’s interest expenses increased to $37 million from $24 million a year ago, and with cash to debt ratio of 0.11x, the company’s balance sheet is overleveraged. By operating at a limited capacity and enforcing social distancing rules, it’s unlikely that Cedar Fair and its peers will be able to return to normalcy anytime soon. For that reason, we believe that Cedar Fair is uninvestable, as there’s every reason to believe that its units will continue to trade at distressed levels until the pandemic is over.
Painful Path Ahead
Cedar Fair had a great performance before the pandemic, as its business was growing annually. However, it will take years for the company to recover from the disruption that was caused by COVID-19 and it’s unlikely that the business will return to its 2019 profitability levels in the foreseeable future. While most of Cedar Fair parks are now reopened, they operate at a limited capacity, and the need to enforce social distancing rules will continue to hurt the company’s bottom line in the following months.
It’s not a surprise that Cedar Fair had a disastrous performance in the first half of the year. In Q2, its revenues were down 98.5% Y/Y to $6.59 million, while its operating expenses for the period were $93 million. In addition, the company suffered a net loss of $133 million from April to June, and its interest expenses during the period increased to $37 million from $23 million a year ago. The good thing is that with $661 million in liquidity, Cedar Fair has enough resources to stay afloat in the short term and it’s very unlikely that the company will become insolvent in the foreseeable future. In addition, it has valuable real estate assets across the country, which it could use to either sell or use it as a collateral to boost its liquidity position.
However, there’s no guarantee that Cedar Fair will not face a liquidity crisis in the long term. The company’s balance sheet continues to be overleveraged and with an interest coverage ratio of 0.54x and with the cash burn rate of $30 million to $40 million per month, its business will continue to generate negative cash flows in the foreseeable future. As a result, investors should expect more dilution and increase of the company’s debt burden, as it’s unlikely that the business will be able to meet its obligations in the long run since it has the cash to debt ratio of 0.11x. In addition, by having a negative net margin and trading at an EV/EBITDA multiple of over 40x, Cedar Fair can’t be considered a solid investment.
Source: Capital IQ
The reality is that Cedar Fair is exposed to risks that are outside of its control and as a result, no matter what measures it implements, its business will not be able to grow in the current environment. COVID-19 will continue to be the major disruptor of its business for a while, as it’s very unlikely that we’ll receive a proper vaccine against the virus later this year. In addition, after drug manufacturers will create a safe vaccine later next year, it will still take a while to develop and distribute it at scale. As a result, it will still take a long time for Cedar Fair business to return to normalcy.
Another problem of Cedar Fair is that it relies too much on debt to keep its business running. While during normal times it’s able to use cheap debt to cover its expenses, grow its business, and reward its unitholders, in times like today that debt is a major red flag. Since Cedar Fair operates at a limited capacity and needs to maintain social distancing rules on its properties, it’s unlikely that its business will stop bleeding cash in the upcoming quarters. As a result, the high debt load and a declining business will make it hard to justify a long position in Cedar Fair, even at the current distressed price. Since the company decided to give free 2021 season passes for all holders of 2020 season passes, Cedar Fair will not be able to show a meaningful growth of its top-line next year too. For that reason we believe that the opportunity cost of owning Cedar Fair is too high, considering that it also has a very bearish quant rating.
Source: Seeking Alpha
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.