Cedar Fair Entertainment Has a Nearly Impenetrable Moat

Cedar Fair Entertainment Company (NYSE:FUN) units are currently yielding more than 7% and its investors have enjoyed superior long-term returns

SmallCapPower | July 11, 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. Today we are going to be discussing one of the reasons we think Cedar Fair is such a good investment, specifically looking at the high barriers to entry in the industry in which FUN operates.

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Cedar Fair operates various developed assets through the U.S. and Canada in an industry with high barriers to entry ­­

When planning for the construction of a theme park, developers should anticipate investing ~$100 per expected first-year guest, based on historical analysis. This means that if the goal is to attract 1M guests, the total investment needs to be equal to ~$100 million. This was determined by looking at a study done by Kelly Kaak, a researcher at the University of Central Florida, where the initial investment costs of 52 parks built in the U.S., converting their investment into dollars (inflation adjusted), was then divided by first-year attendance figures. The overall average was $109.61, and this number has been increasing. For reference:

Even with all this knowledge, it can be difficult to pinpoint the actual investment required per guest. When looking at the 52 parks that were built, 71% of these parks estimated an initial investment per guest that was below the actual initial investment per guest, with 33% of these parks missing their estimates by over 50%.

Not only is the initial investment difficult to forecast, it is also large. A $100 million investment to start a regional and superregional theme park is uncommon, as these theme parks generally cost on average anywhere from $200M-$500M, according to The Park Database. Not only does starting an amusement park require a large initial investment, but it also takes a significant amount of time for the entire process. First, the land needs to be acquired, as well as all required building permits and funding to build a theme park on it. This involves getting architects involved to produce plans to submit to the local government, as well as investors willing to put enough dollars forward to build the site. Roller coaster architecture is a specialised job, and it can take years just to design one attraction, let alone an entire park. The next step is to do a full survey of the site, including work on the bedrock, as this is crucial seeing that roller coasters need solid foundations. Advertising needs to be done, as well as staff hired and trained to operate the machines. Engineering staff also need to be hired and trained to ensure that the rides are continuously meeting various standards. Obtaining insurance for a theme park can also be a long process. Overall, the entire process can take anywhere from 5-15 years.

What further protects Cedar Fair is that the Company’s diverse operations protect it if a competitor does enter the industry within close vicinity to one of Cedar Fair’s parks. FUN has parks in Ohio, California, Ontario, North Carolina, Virginia, Pennsylvania, Missouri, Michigan, and Minnesota. Even if a competitor were to successfully open a theme park in one of these states, which could erode Cedar Fair’s market share, Cedar Fair’s diverse geographic footprint shields them from this unlikely threat.

Shares of Cedar Fair ended Wednesday’s trading session up nearly 2% at US$48.56. Cedar Fair’s units trade at a market cap of US$2.7 billion.

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