Interactive Buyside Equity Research

November 22nd, 2013

CEDAR FAIR, L.P. Thesis Overview

In the eyes of Broyhill Asset Management (BAM), ideal investment candidates have the potential to double over a three to five year horizon, as Chief Investment Officer, Christopher Pavese, seeks to purchase shares at an equivalent discount to intrinsic value based upon a companys normalized earnings power. This hurdle, combined with Broyhills quality mandate, tends to limit the firms investable universe, and as a result, Pavese will often hold high cash balances in the absence of opportunity. But when BAM finds high quality businesses with defensive characteristics, high barriers to entry, and pricing power that are distributing cash to owners, they are sized accordingly. Cedar Fair (FUN) meets each of these requirements and recent weakness - driven by short term panic created by rising interest rates rather than long term fundamentals - presented investors an attractive entry point to purchase shares, now yielding nearly six percent.

Stock Rating Catalyst Category Price Target Price (11/22/13): $46.63 Upside/(Downside): 39% Ticker: FUN Exchange: NYSE Industry: Amusement Parks Trading Stats ($USD millions) Market Cap: $2,598 Enterprise Value: $3,945 Dividend Yield: 5.2% Price / 2014E EPS: 17.4x Price / 2015E EPS: 11.0x EV / 2014E EBITDA: 8.9x EV / 2015E EBITDA: 8.4x
Source: Company filings, Wall Street Consensus

BUY Value $65.00

Price Performance 52 Week range: $31.77 - $48.59 Analyst Details IB Username: Christopher Pavese Employer: Broyhill Asset Management Job Title: Chief Investment Officer Analyst Disclosure FUN Position Held: Yes

Interactive Buyside Equity Research

November 22nd, 2013

Company Overview
The amusement park industry is a clear-cut and easy to understand business model. Cedar Fair owns and operates amusement parks and generates almost all of its revenues from the sale of tickets in addition to food & merchandise. Unlike peers in the leisure industry, FUNs revenues are incredibly resilient as its regional parks cater to recurring day-tripping visitors from the surrounding area rather than long-distance visitors to destination parks. As a result, the business enjoys a natural economic stabilizer during difficult times, as consumers cut back on more expensive vacations in favor of the value offered by amusement parks closer to home. BAM analyzed attendance records going back to 1990 and found only three instances where the industrys head count declined, but only a single period in which revenues fell year over year. In each of these instances, the recovery in the following year made up nearly all of the lost ground. This is a very good business.

Industry Snapshot
The amusement park industry is a highly concentrated, mature industry which benefits from high barriers to entry in the form of limited land supply, arduous zoning restrictions, and substantial capital requirements. With major markets already well served by established incumbents, new entrants have little hope of gaining ground with thrill seekers. This competitive landscape provides Cedar Fair with significant economies of scale through its near monopolies of niche markets. Consequently, there has been zero growth in the number of amusement parks over the last decade. FUN management has previously commented that there has not been a successful new regional park built in the past three decades. Furthermore, Google has yet to announce plans to start building rollercoasters on this planet (others may be up for discussion).

Interactive Buyside Equity Research

November 22nd, 2013

Financial Analysis
Given the maturity of the industry, attendance growth is unlikely to be a significant top line contributor. However, the industry has still managed to grow revenues at close to a 2% annual rate over the last five years. This seems like a fair starting point to model sales growth, although FUN may further boost top line growth through a number of recent initiatives to improve pricing, reduce discounts and extend the season beyond the second and third quarter. Strategically, management is focused on enhancing the guest experience with premium product offerings, dynamic pricing and advance purchases (i.e. season passes, etc.). Given the companys fixed cost structure, incremental top line gains should ulti mately drive higher margins and increased cash distributions to unit-holders. Again, Broyhill assumes little margin expansion in their base case, but believes FUN has room to improve its stable, industry leading EBITDA margins by roughly 100 bps over the next three years. With only six analysts covering the stock, shares were slow to rerate after the company suffered financial difficulties during the financial crisis. While this is an extremely capital intensive business annual capital expenditures approximate 9% of sales with a highly fixed cost structure, FUN generates very consistent cash flow which is largely recession-resistant. Consequently, management has been able to consistently deleverage its balance sheet since the crisis, leaving significantly more cash available for distribution while putting the company on a much stronger financial foundation. The resulting capital allocation story is the foundation of Broyhills investment thesis as the bulk of the companys cash flow can now be returned to investors rather than building new parks, acquiring competitors or paying down debt. Note that Broyhills estimates of cash distributions are reported in the final section of this report.

Finally, FUNs core assets, located largely in Middle America are well positioned to capitalize from any economic benefit related to the potential for a domestic manufacturing resurgence. Admittedly, economic shifts of this magnitude are difficult to predict with a great level of confidence, but the evidence here is increasing. Note the steady increase in energy and transportation costs over the past decade and the more recent collapse in domestic energy prices driven by an unprecedented surge in natural gas supply. Natural gas was priced at $4 in the US in April versus $17 in Japan and Korea. The consistent increases in Chinese labor costs alongside of declining unit labor costs at home represents an additional tailwind. Meanwhile, manufacturing GDP has grown at almost double the pace of overall GDP during the current recovery. As a result, manufacturing employment is growing at nearly twice the average rate in states like Ohio, where overall employment is near its prior peak. This bodes well for Cedar Fairs core markets as the majority of the companys EBITDA and flagship properties are based in the Midwest.

Interactive Buyside Equity Research

November 22nd, 2013

Valuation
The few analysts that cover the stock tend to value shares on a multiple o f EBITDA. A quick look at FUNs peer group shows the stock trading well below the industry average. It appears that the market does not yet appreciate the safety of modern rollercoasters or the defensive characteristics of the relatively small and underfollowed amusement park industry. If management is able to achieve its long term goal of $450 million in EBITDA by 2016, and the market values FUN in line with its closest competitor, SIX, the stock would be trading at twice todays levels. Broyhill doesnt think either of these factors are unreasonable assumptions, but uses more conservative estimates to generate a range of fair values for the stock.

Investors may also view an investment in FUN in a similar context as MLPs, Utilities or REITs where the companys stable and growing cash flows are valued relative to the yields available in the current marketplace. In this respect, the markets Pavlovian reaction to tapering presented investors with a compelling opportunity to purchase FUN at a price which should generate a double-digit dividend yield on Broyhills estimate of normalized earnings power. This is not 1994 or 1975. If the Fed could create inflation it would. But it cant. Instead, inflation expectations have collapsed year -to-date, despite the mini-rally in yields, consistent with the pattern in 2010, 2011 and 2012. Investors have seen this movie before and each time, the surge in yields was followed by an even greater move lower. Dont expect anything different today as the multipliers between money and credit remain broken, and as a result, the economy is dependent upon low rates to keep the system alive. Prudent investors looking for a little FUN stand to do quite well in this environment, as the market should continue to bid up the price of high quality, income generating assets. Annualizing the companys recently increased quarterly dividend, the stock yields 5.8% today, which is quite attractive in a zero interest rate world, yet slightly below the companys 7% long term average yield. Historically, the company has traded 200 basis points over treasuries, although admittedly this spread has varied greatly over time. Even still, this is a good place to start for perspective. With this in mind, investors can develop a range of fair value estimates based on normalized earnings power three years out. Broyhill assume top line growth of 2% to 4% given limited supply and competitive dynamics which should continue to benefit pricing. Growth at the low end results in no margin expansion over this forecast period while better-than expected sales would drive increased profitability at the top end of the range, resulting in a 100 basis point increase in EBITDA margins. For each scenario, Broyhill assumes the company spends 9% of sales annually on capital expenditures, along with additional expenditures while paying out 90% of distributable cash flow net of fixed charges.

Interactive Buyside Equity Research

November 22nd, 2013

Bottom Line
The end result of this exercise is a range of 2016 distribution estimates from $3.50 on the downside to $4.00 at the high end. Investors can capitalize these unit distributions at various rates to derive fair value estimates. The results are quite compelling, with little risk on a three-year horizon even assuming an 8% discount rate over 200 basis points higher than today and almost 500 bps above treasuries. Conversely, capitalizing the bull case distribution at the current yield should produce a total return of 60% for investors. And in an extended environment of zero interest rates, an even lower yield is not out of the question the stock traded at a 4% yield in 2011-2012. Now that is FUN.

Interactive Buyside Equity Research

November 22nd, 2013

Financial Overview & Valuation

Revenues Y/Y Growth Adj EBITDA EBITDA Margin Y/Y Growth Consolidated Fixed Charges Interest expense Cash taxes Capital Expenditures Consolidated Fixed Charges Excess cash flow Distributable Cash Flow Payout Ratio Distribution Diluted Units Distribution per Unit 2007 987 2008 996 0.9% 356 35.7% 4.5% 2009 916 -8.0% 317 34.6% -11.1% 2010 978 6.7% 346 35.3% 9.2% 2011 1,028 5.2% 365 35.5% 5.7% 2012 1,068 3.9% 384 35.9% 5.1% 2013e 1,130 5.8% 423 37.4% 10.1% 2014e 1,164 3.0% 437 37.6% 3.5% 2015e 1,199 3.0% 452 37.7% 3.5% 2016e 1,235 3.0% 468 37.9% 3.5%

341 34.5%

138 21 79 237 103 79 130% 103 56 1.84 $

120 15 83 218 137 103 102% 105 55 1.90 $

117 19 69 205 111 72 94% 68 56 1.21 $

130 19 72 221 125 110 13% 14 55 0.25 $

153 6 90 250 115 104 53% 55 56 0.99 $

111 11 90 212 172 97 92% 89 56 1.59

100 20 119 239

92 25 138 256

83 37 125 245

83 38 111 232

183 182 207 236 183 182 207 236 77.0% 90.0% 90.0% 90.0% 141 163 187 212 56 56 56 56 $ 2.58 $ 2.92 $ 3.34 $ 3.79