Cedar Fair units tank after announcement to drop distribution

Posted Monday, November 16, 2009 11:23 PM | Contributed by Jeff

Shares of amusement park operator Cedar Fair, LP were punished by investors last week on the news of its third quarter earnings and the announced likely suspension of its dividend beginning next year. While the company saw its profits rise on lower revenue, its once-generous dividend distribution has been prized by income investors for many years, so the news of dropping the dividend caused many investors to flee the stock. Cedar Fair stock had been trading at $9.52, but fell to $6.99 on the announcement.

Read more from Investopedia.

Tuesday, November 17, 2009 12:47 AM

I know its not "real" but I was pretty ticked off when I saw that gigantic drop in my investments class stock portfolio. Had it not dropped like a rock I might have had a chance at beating my professor. Oh well, I guess I should have anticipated a bigger drop than I did (I was expecting a buck).

I wonder how this will affect things like future debt holder posturing and even the Great America situation. I've got to believe that a major devaluation in the unit price would be seen as a sign that Great America may not be as valuable as Cedar Fair would like the team and city to believe.

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Tuesday, November 17, 2009 9:24 AM

I think this is a lot less about GA and more about the role this holding played in institutional investors' portfolios as an income producer.

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Tuesday, November 17, 2009 9:47 AM

I would expect lenders to look favorably on the suspension of the dividends. Lenders typically do not care as much about stock prices as they do cash flow and leverage, both of which will be helped by suspending the dividend.

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Tuesday, November 17, 2009 11:12 AM

Brian Noble said:
I think this is a lot less about GA and more about the role this holding played in institutional investors' portfolios as an income producer.

I quite agree, and almost said as much. But I think it will have some impact. It certainly suggests that now the company (and thereby its parks) is worth less. How much less? I don't think $3 per unit less, but certainly value has gone down.

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Tuesday, November 17, 2009 11:56 AM

I don't think folks who would potentially be interested in GA's assets would view it that way. The movement in the price of CF units over the past week or so has been based on a combination of CF's overall operating results for the 3rd quarter, the suspension of the dividend (the most significant factor by a lot) and the overall market/economic conditions. The buyer of GA's assets would only care about GA's performance, its ability to generate cash flow, etc. and to a lesser extent the general market/economic conditions. Based on GA's performance that its value may be higher or lower now than it was last quarter or last year. But you can't make that determination simply by looking at what has happened with CF units over that time period.

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Tuesday, November 17, 2009 12:01 PM

There is no correlation there, Mike. The value of the assets is what it is, and the revenue that a park brings in is what it is. That's not increased or reduced because the stock price goes up or down. Think of it this way, if you argue that the value of each park is worth less now that the stock price has dropped, shouldn't Santa Clara, Sandusky, Allentown, etc. lower their tax bills accordingly?

Cedar Fair was a stock that paid a pretty healthy dividend, and for many quarters increased it. That made it a very attractive holding for banks and fund managers who don't know an Immelman from a hole in the ground, but they knew a return of 6-7% was very good. Without that return, there is little reason for these institutions to hold onto CF units. They sell them, demand decreases, supply increases, the price goes down.

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Tuesday, November 17, 2009 4:03 PM

Is the drop in dividend distribution temporary? If it is, this would be a great time to buy some shares. If it isn't, what's the point in owning Cedar Fair anymore?

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Tuesday, November 17, 2009 4:17 PM

Spokesperson for CF indicated that she couldn't say whether the dividend would be brought back. But they understood that they would lose income investors with the move and pick up value investors.

Per the article linked at the top of this discussion:

"Cedar Fair has been traditionally well managed and the numbers, apart from the dividend drama, are not bad considering the horrible recent economy. In a brilliant piece on the fundamental value of Cedar Fair, Seeking Alpha's Paul Price details how suspending the dividend to pay off debt is the right move, how the stock price being smashed is the prelude to value/growth investors rather than income investors taking a serious look at Cedar Fair. With a ten-year median PE of roughly 16, this year's price multiple for the stock will be somewhere between five and six, so even with recessionary numbers, Cedar Fair may become a bargain. It must continue to work down its debt, but with a better economy and future earnings increases, the stock may one day not only amuse, but delight, investors."

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Tuesday, November 17, 2009 6:22 PM

LostKause said:
If it isn't, what's the point in owning Cedar Fair anymore?

I think you've answered your own question.

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Tuesday, November 17, 2009 7:28 PM

Now's a perfect time for a regime change..

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Tuesday, November 17, 2009 7:57 PM

^ Bingo! Get rid of Kinzel!

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Tuesday, November 17, 2009 9:50 PM

You know, I have been trying to stay out of the whole "get rid of Kenzel" bandwagon, but with this news, I'm ready to jump on board.

I didn't anwser my own question, Creditwhore. Is there any clues as to if the company will distribute dividends after the economy gets back on it's feet, or will the company have ripped off all of the people who have been using the stock as an income?

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Tuesday, November 17, 2009 11:25 PM

Thanks for the responses. I wasn't sure if I was looking at it from the right direction, and you all managed to point me in the right way. Thank god the only class I actually enjoy this semester is actually well worth taking right now.

LK, I think the future of the distribution will be largely dependent on who steps up to CEO after/before the 2012 season (I know 2012 is the magic number, I just forget if its the beginning or end of the year. End of would make more sense, I think). The current corporate lineup became accustomed to the distribution as they obviously held decent amounts of units (didn't Kinzel have something around/over 1 million last count? That sounds about right). I would bet on the distribution being out of the picture until at least 2012, if the debt payments are handled right and the economy rebounds how some hope it will. The current amount of debt is too large for me to believe they'll be free of it any quicker than two years, and even that is very optimistic for me. So if we take the angle that the debt is reduced to an extremely low level or removed completely by the time Kinzel retires I think it comes down to who steps up to CEO. If it is someone internally I would expect the distribution to return as soon as possible with as little consideration as possible. If by some miracle it is an "outsider" I think you will see them take a much closer look at reinstating it, as that person will not have gotten used to reaping those distribution payments and will likely be less eager to reinstate it without giving it a thorough examination. Should it return, I would expect it to be no more than half of what it was at first.

Of course, that's just what I see from my still learning standpoint. Take it at face value, which is only worth about...oh, $0.02. PayPal only, please. ;)

I would also like to add that I'm obviously just looking at it from one very narrow angle; who replaces Kinzel as CEO. I think that will be a major factor in determining the future of the distribution, but obviously not the only factor.

Last edited by maXairMike, Tuesday, November 17, 2009 11:27 PM
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Tuesday, November 17, 2009 11:42 PM

I'm surprised unit price crashed as much as it did. I mean, c'mon, was there anybody who didn't see this coming? If I owned CF, I would've divested at least a year ago, maybe two...and I don't even pay that much attention to the market.

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Wednesday, November 18, 2009 12:03 AM

How are investors being ripped off by the suspension of the dividend? There was no guarantee that the dividend would continue when they invested.

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Wednesday, November 18, 2009 1:34 AM

Prior to this year, there had really been no hint, no thought or word given to the distribution other than the almost routine yearly increase in the distribution. Investors had been sitting on units for quite some time and I'm sure they had kind of been lulled to sleep so to speak on this one. Compared to how long it took the distribution to get to its current rate, the time between serious talk of ending it and actually stopping it was like pulling a rug from underneath. It certainly wasn't fast compared to how the market in general moves, but compared to Cedar Fair itself and how the distribution had steadily increased on a pretty much reliable yearly basis, this was rather fast. I'm sure the institutions/big investors who were still sitting on it weren't expecting it to get pulled completely. Or at least, not as soon as it did. They (the remaining major holders) were likely content at the $1 mark, and would probably have been content with lower.

While "ripped off" may not be quite the right phrase, I understood what was meant. I don't think the meaning of the post was dramatically changed by using that phrase.

Last edited by maXairMike, Wednesday, November 18, 2009 1:35 AM
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Wednesday, November 18, 2009 9:44 AM

I think there were a lot of hints though I haven't looked back at CF press/earnings releases to see if CF gave any. But the general economic conditions, CF's debt load and the status of the credit markets were big hints that the dividend policy would change. Large/institutional investors should have understood that. And once CF itself starts hinting strongly/makes official any change in dividend policy, the market is quick to reflect that in the unit price.

As for the quick move (first decreasing then eliminating the dividend), that is just a fact of life in the current economic climate. There have been massive changes literally overnight.

From what I have seen, I think they held on to the dividend too long. I suspect in large part they were looking at the "ripped off" view that many investors have with the reduction/elimination. But to me, people were going to be ticked when you reduced it and ticked again when you eliminated it so why not just tick them off once and eliminate it from the start. There may have been other factors that they considered of which I am unaware so its tough to judge/criticize. Though from what I have seen, I think that the decision to eliminate the dividend was the right move for CF in the long run.

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Wednesday, November 18, 2009 10:49 AM

maXairMike said:
Prior to this year, there had really been no hint, no thought or word given to the distribution...

That's completely untrue. They've been threatening to alter the distribution for almost two years now, if I recall correctly. It came up long before they reduced it in press releases.

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Wednesday, November 18, 2009 11:10 AM

Maybe I missed those mentions, then. I don't remember hearing anything about reducing the distribution until this year, but I could certainly be wrong. Maybe in skimming the press releases I overlooked them. I know nothing really caught my attention until this year (not the start of the season, but early in the year). And maybe that's the problem, people just got too comfortable and didn't start taking notice until things were really starting to take a dive (we may have been discussing the downturn of CF for almost two years, but would anyone who doesn't know and discuss the industry like we do have noticed it like we did?).

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