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Coverage Initiation: Six Flags Entertainment Corp. (SIX)
Value Line recently initiated coverage of Six Flags Entertainment Corp. (SIX) in its flagship product, The Value Line Investment Survey. The company owns and operates regional theme, water, and what it calls zoological parks. Seventeen of its 19 parks are located in The United States, with the remaining two parks located in Mexico City, Mexico and Montreal, Canada. These parks offer a broad selection of state-of-the-art and traditional thrill rides, water attractions, “themed” areas, concerts and shows, restaurants, game venues, and retail outlets.
The company’s amusement parks are generally located in markets with close proximity to material populations. The company notes that its 19 parks serve a combined population of approximately 100 million within 50 miles of the parks. Extending that range to 100 miles adds an additional 70 million potential customers. Note that as a regional amusement park, the ability for customers to easily drive to one of the company’s facilities is vital. A 100 mile trip may seem a great distance, but it is likely about a two hour drive, well within reason for an all-day outing at an amusement park. That said, completely uncontrollable factors, like weather, can have an outsized impact on attendance.
Regional amusement parks have an interesting position in the entertainment industry in that they tend to do well during strong economic times, as more people go to parks, but also hold up well during weak economies, as people look for entertainment options closer to home in lieu of travel based vacations. That said, Six Flags and its peers are not immune from economic slowdowns, as things like in-park spending, an important component of revenues, can fall dramatically even if attendance remains relatively stable. It is also important to remember that approximately 80% of park attendance and revenues occurs in the second and third calendar quarters of the year, since regional parks are generally seasonal in nature. Thus, the company will likely lose money in the first and fourth quarters, a trend that shouldn’t be concerning, but that highlights the importance of the summer operating season.
Capital spending is another factor that presents an odd paradox. Amusement parks are large and expensive to build and maintain. This helps to limit competition. However, rides and amenities age and lose their attraction, making capital spending on new rides and park enhancements paramount to maintaining attendance levels. On an ongoing basis, the company’s plans call for 9% of revenues to be dedicated to capital spending, with some 60% of that earmarked for new rides and attractions. In 2011, for example, the company added seven new roller coasters at its parks. On an ongoing basis, maintenance, insurance, and the cost of complying with federal, state, and local laws and regulations are material costs of doing business.
Six Flags has exclusive long-term licenses throughout the United States (except the Las Vegas metropolitan area), Canada, and Mexico to use certain Warner Bros. and DC Comics characters at its theme parks. These include such ubiquitous characters as Bugs Bunny, Daffy Duck, Batman, and Superman. In addition, the company has rights to use Hanna-Barbera and Cartoon Network characters, including Yogi Bear, Scooby-Doo, and The Flintstones. These characters are an important component of the company’s advertising and merchandising efforts. The loss of the rights to any of these characters would likely reduce top and bottom line performance.
Although Six Flags is known for big rides, the biggest news about the company is likely its emergence from bankruptcy in 2010. The move pared the company’s debt load, more or less wiped out previous equity holders, and set the amusement park operator on solid footing. In fact, after struggling for years to reinvent itself while trying to stay solvent, the company now appears to have a new focus and the financial strength to bring its plans to fruition. The stock price’s impressive advance since 2010 is probably in recognition of this fact.
Investors should note that the dividend disbursement, which increased from $0.03 per quarter to $0.60 per quarter in less than two years, is not covered by earnings. However, this is less of a worry than it may appear because dividends are paid from cash flow, not earnings. Since the company’s business requires large investments, depreciation is a material non-cash charge that gets added back to cash flow, allowing the company to amply cover the distribution with the cash it generates.
Looking forward, it is unlikely that the company will materially grow its presence in the U.S. market. Making expansion efforts at existing parks and cost increases important for continued revenue and earnings growth. However, the company has stated that it is looking to use a franchise like model to expand the Six Flags brand into global markets. Although this has promise on the growth front, it also comes with risks since the company will not be in control of the parks that may bear its name.
Subscribers interested in owning a piece of a well-known regional amusement park operator that seems to have used bankruptcy to get back on its feet should consult the regular quarterly reports for Six Flags Entertainment Corp., while keeping an eye out for supplemental reports highlighting important news as it occurs.
At the time of this articles writing, the author did not have positions in any of the companies mentioned.