Fun for the Money

Fun for the Money

Posted On May 7, 2015 12:09 pm

This amusement park operator is poised to have a blowout summer as middle America hits the road.

Today I’m looking to mix business with pleasure by establishing a bullish position in Cedar Fair ticker symbol (FUN). Cedar Fair operates a total of 20 amusement parks, water parks and hotels in the United States and Canada. The bulk of the locations are across the middle of the country with four in Ohio and three in Minnesota, but it also has water parks in California and North Carolina. What it lacks in high profile attractions, such Universal’s Harry Potter World or Disney’s (DIS) many movie themed rides, it makes for in convenience and value.

The company reported first-quarter earnings on May 1st and it missed on the top line with a with a net loss of $1.50 per limited partner unit vs expectations of a loss of $1.28. But it beat on top line with revenue of $46.8 million well above the $42 million expected. But the company, which is set up as Limited Partnership, must be feeling confident as they boosted the distribution and it now has very healthy 5.2% dividend. The stock initially responded well with a move to a new intraday high of $57.80. But as stocks fell and interest rates rose over the past few sessions it has slipped to $56.50 level.

Big Summer Staycation Plans

On its conference call Cedar Fair says it expects a very strong summer with seasonal pass sales already running 8% ahead of last year. Other operators in the industry have been equally optimistic.  In their recent earnings reports both Disney and Comcast, which owns Universal, showed 11% and 15% increases at their theme parks and expect strong summers. Even Seaworld (SEAS), which has suffered through bad publicity surrounding the treatment of dolphins and Orcas, saw a 9% jump in revenue for its latest quarter. While these parks have a higher price tag and cater to longer vacations usually arrived at by air, it still bodes well for improved consumer spending this summer.

Cedar Fair was a big beneficiary of the “staycation” trend that began post 9/11 when people didn’t want to travel by air. That trend grew during the financial crisis when families opted to stick with shorter less expensive trips to destinations within driving distance. Even with the stock market at all-time highs most of middle class, especially across the farm belt, remain budget conscious. Cedar Fair caters to the large swath of middle America that has now made the “staycation” a firmly entrenched trend in travel.

Another good indicator came from Choice Hotels (CHH), which reported earnings on May 6th that were above expectations. But it was the comments from the CEO which really stood out, as he said business is as good as he’s ever seen with summer bookings running 14% above a year ago. Choice operates budget friendly chains including Comfort Inn, Quality Inn, Clarion and EconoLodge brands. It’s business is 70% leisure/family travel and has overlap with Cedar Fair patrons.

The Trade:

We want to buy options that will carry us through the third quarter earnings, which will include the summer vacation period.

I’m targeting the purchase of the December $55 calls at $3.75 a contract.

I have an upside target of $65 a share but would look to take partial profits if the value of the calls doubled to $7.50 at any point prior to the December expiration.

Photo: Phalinn Ooi via photopin (license)

About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.