Cedar Fair Entertainment Company (NYSE:FUN) generates robust free cash flow and has a 7.3% dividend yield
SmallCapPower | July 15, 2019: Cedar Fair Entertainment Company (NYSE:FUN) operates amusement parks, water parks, and hotels in the United States and Canada. The Company operates 12 amusement parks, two outdoor water parks, one indoor water park, and five hotels. Some of the Company’s notable amusement parks include Cedar Point, Canada’s Wonderland, and Kings Island. Last week, we discussed how Cedar Fair Entertainment Has a Nearly Impenetrable Moat. Today, we are going to talk about how Cedar Fair’s business model helps the Company create loyal customers and free cash flow generation.
Cedar Fair Entertainment has a successful business model with a value proposition that creates loyal and repeat customers. Seasons passes and advanced commitment payments make up ~two thirds of sales for Cedar Fair. Cedar Fair Entertainment has one of the best season pass programs relative to its largest competitors. Six Flags Entertainment Corporation (NYSE:SIX) has ~55% of its revenue derived from season-pass sales, while SeaWorld Entertainment has less than 10% of its revenue comprised of season-pass sales. The importance of season passes and advanced commitment sales in this industry is that these sales are not cyclical and are not as contingent on weather conditions or the economy. Amusement and theme parks can take big hits during recessions, but season-pass sales can save these parks due to their inelasticity relative to other pass sales. In fact, Cedar Fair realized EBITDA growth throughout the 2007-2008 recession due to its high composition of season’s pass and advanced commitment sales. 
Cedar Fair Entertainment is looking to further promote advance purchase commitments that create more consistent visitation patterns and reduce the impact of disruptive events, such as bad weather. The Company is planning to transition from a seasonal, transaction-based program to a long-term, relationship-based program, and evolve their seasons pass program to focus more on affordability concerns for value-oriented guests while maintaining admission pricing integrity. Cedar Fair is also looking to drive higher unit sales through stickier retention by introducing a loyalty and rewards program. This program will provide passholders an opportunity to earn and redeem rewards throughout the year, which the Company will begin testing at several parks in 2019, with a broader rollout taking place in 2020. Finally, Cedar Fair wants to increase the average visitation of its season passholder base by expanding its number of special events as well as the introduction of a loyalty and rewards program. All the improvements FUN is looking to make is expected to help shield the Company further during economic downturns and provide Cedar Fair with an even more reliable revenue stream.
This strategy helps Cedar Fair generate large amounts of free cash flow, which drives a strong dividend yield and fuels the Company’s acquisition strategy. Cedar Fair Entertainment has had a proven history of free cash flow generation. FUN generated $237M, $148M, and $196M unlevered free cash flow in 2016, 2017, and 2018, respectively. Cedar Fair currently has a free cash flow yield of ~7%. The additional free cash flow helps fuel its additional growth and development, which includes building more accommodations for guests (hotels, cabins), in addition to other complementary commercial development opportunities in retail, dining, and entertainment. This also gives Cedar Fair Entertainment the opportunity to acquire other amusement and water parks, which they have historically done frequently. Recently, the Company acquired Sawmill Creek Resort, a 235-acre resort with a half-mile beach, a marina, and 50 acres of undeveloped land. Cedar Fair also use this free cash flow to pay out a generous dividend, and currently have a ~7.3% dividend yield.
Cedar Fair Entertainment ended Friday’s trading session up 0.5%, closing at US$50.24. Cedar Fair stocks trades at a market cap of US$2.8B.
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