Shares of Six Flags (SIX: Charts, News, Offers), the theme park operator which rose from the ashes of bankruptcy protection in April 2010, have quietly doubled in value since its rebirth. Unlike Disney (DIS: Charts, News, Offers), which will be an instant comparison for most investors, Six Flags is not a media conglomerate – its business is non-diversified and solely focused on the operation of the 19 amusement parks it owns. Of these, 17 are located in the United States, and the other two are located in Mexico City and Montreal. As a casualty of the financial meltdown of 2008-2009, Six Flags (formerly trading under ticker SFI) filed for bankruptcy protection in June 2009. The company reduced its debt by $1.7 billion while intentionally maintaining $1.3 billion in losses to reduce its tax liability. The company has been hard at work cutting its operating expenses by 12% over the past year. With a trailing P/E of 3.48 and trading at 2.46x book value, the reborn company appears technically undervalued. Can Six Flags maintain its strong start amid decreased discretionary spending, inflation and economic uncertainty?
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Six Flags’ first line of defense is the high barrier of entry for new competitors. In times of economic uncertainty, major corporations (except for Disney) are unlikely to invest in expensive new theme parks. The company is also focused on building more average priced rides at more of its parks as opposed to investing in only a few high budget rides in a few major parks. The company is also balancing its discounts and promotions to assure the highest yield by season. Prior to its bankruptcy, Six Flags was notorious for heavy discounts in its widespread promotions, focused on driving volume through a high volume, low margin business model. Six Flags is also well known for its licensing and sponsorships – visitors to the park are familiar with its Warner Brothers characters – and it also holds long-term contracts with Papa John’s (PZZA: Charts, News, Offers), Nintendo, Tyson Foods (TSN: Charts, News, Offers) and others. Current licensing fees comprise 5% of the company’s revenue, a figure which is likely to increase considering annual attendance at Six Flags parks now exceeds that of the NBA, NFL, NHL and NASCAR events, on an individual basis. In addition, its 39% ownership of Dick Clark productions, whose intellectual properties are featured prominently in its theme parks, pays out a $41 million quarterly dividend. Sales of season passes increased 26.7% over the previous year, a positive sign considering that season pass visitors have traditionally constituted a third of the parks’ total visitors. These are all positive catalysts which may propel the stock towards bullish price targets between $90-$100 per share. As a strong vote of confidence, CFO John Duffey purchased $1.7 million in shares back in February, when the stock was trading in the lower $60s.
Of course, there are also economic headwinds ahead that might knock investors off course. Rising oil prices will knock all companies based on discretionary spending down, and with continuing conflicts in oil-rich Libya, Yemen and Nigeria, oil prices seem destined to continue their ascent. However, the company has maintained that during times of rising gas prices, its regional theme parks has benefited as families stay closer to home and avoid large theme park resort destinations such as Orlando, Florida. Both Universal Studios and Disney raised prices last year to take advantage of peak load pricing, but it’s uncertain if Six Flags can hike prices and still maintain customers – after all, its parks lack the international tourist appeal of Universal and Disney. Higher commodity prices coupled with inflation may also increase the construction cost of new rides. However, the company has already stepped away from large “mega coasters” which will reduce this risk. Maintenance costs could also hurt the company’s bottom line if guest traffic comes in lower than expected.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
yup thats true
More like Six Flags was stolen from its bond & stock holders.