The $4.6 billion Texas-based leisure company Six Flags Entertainment Corporation (SIX, Financial) reported its second quarter results recently. The Grand Prairie, Texas-based park operator reported a nearly flat revenue growth for its first half revenue at (-)0.1% to $521.9 million and a significant profit drop of (-)57.5% to $14.08 million.
Six Flags also provided $19.6 million of its profits (more than what it generated) to its noncontrolling interests thus ending in an actual (-)$5.52 million loss for its shareholders in the period compared to $13.95 million in profits a year earlier.
Reviewing its financials for the first half also indicated that Six Flags committed a minimal increase in operating expenses at 0.7% and an actual drop in general and administrative expenses at (-)10.5%. The company nonetheless logged a $37.1 million expenses related to its debt extinguishment thus shedding any profits in the period.
“We are the leading regional theme park company in the world operating in a very attractive industry with significant opportunity for organic growth.
“We have the best team in the theme park space, and I am confident that 2017 will be another record year for our shareholders as we deliver higher ticket yields, improved in-park revenue, attractive international licensing deals, new waterparks, and strong execution.”
Jim Reid-Anderson, Chairman, President and CEO
Valuations
Six Flags is overvalued compared to its peers. According to GuruFocus data, the company had trailing P/E ratio 49.7 times vs. industry median 23 times and P/S ratio 3.7 times vs. 1.9 times. Six Flags had $554.7 million more liabilities than its assets resulting to negative book value in the recent period ending in June.
Six Flags also had trailing 4.69% dividend yield with 240% payout ratio.
Average fiscal 2017 revenue and earnings-per-share estimates indicated forward multiples 3.3 times and 28 times.
Total returns
Six Flags provided (-)9.09% total losses so far this year compared to 9.89% gains made by the S&P 500 index (Morningstar).
Six Flags Entertainment Corporation
Six Flags Entertainment Corporation was founded 56 years ago and had fallen into bankruptcy during the financial crisis about a decade ago.
According to filings, Six Flags is the largest regional theme park operator in the world based on the number of parks it operates. Of Six Flags’ 18 regional theme and water parks, 16 are located in the United States, one is located in Mexico City and one is located in Montreal, Canada.
Six Flags’ theme parks serve each of the top 10 designated market areas, as determined by a survey of television households within designated market areas published by A.C. Nielsen Media Research in September 2016.
The company’s diversified portfolio of North American theme parks serves an aggregate population of approximately 100 million people and 175 million people within a radius of 50miles and 100 miles, respectively, with some of the highest per capita gross domestic product in the U.S. (1)
Six Flags’ also hold exclusive long-term licenses for theme park usage of certain Warner Bros. (TWX) and DC Comics characters throughout the U.S. (except the Las Vegas metropolitan area), Canada, Mexico and other countries. (2)
The company’s licenses include the right to sell merchandise featuring the characters at the parks, and to use the characters in its advertising, as walk-around characters and in theming for rides, attractions and retail outlets.
Partnership Park Arrangements (Six Flags Obligations)
In 1998, the company acquired the former SixFlags Entertainment Corporation (a corporation that has been merged out of existence and that has always been a separate corporation from Holdings, "Former SFEC").
In connection with its 1998 acquisition of Former SFEC, Six Flags guaranteed certain obligations relating to the Partnership Parks. These obligations continue until 2027, in the case of SFOG, and 2028, in the case of SFOT. Such obligations include:
(i) Minimum annual distributions (including rent) of approximately $69.7million in 2017 (subject to cost of living adjustments in subsequent years) to the limited partners in the Partnerships Parks (based on Six Flags’ ownership of units as of December 31, 2016, its share of the distribution will be approximately $30.4million)
(ii) Minimum capital expenditures at each park during rolling five-year periods based generally on 6% of Partnership Park revenues.
Cash flow from operations at the Partnership Parks is used to satisfy these requirements first, before any funds are required from Six Flags. We also guaranteed the obligation of its subsidiaries to annually purchase all outstanding limited partnership units to the extent tendered by the unit.
After payment of the minimum distribution, Six Flags is entitled to a management fee equal to 3% of prior year gross revenues and, thereafter, any additional cash will be distributed first to management fee in arrears, repayment of any interest and principal on intercompany loans with any additional cash being distributed 95% to Six Flags, in the case of SFOG, and 92.5% to Six Flags, in the case of SFOT.
Six Flags has only one reportable division: Theme parks. Further, the primary performance measures used to allocate resources is Park EBITDA (defined as park-related operating earnings, excluding the impact of interest, taxes, depreciation, amortization and any other noncash income or expenditures).
Six Flags revenue is primarily derived from (i) the sale of tickets for entrance to its parks (approximately 52% of total revenues in the first half), (ii) the sale of food and beverages, merchandise, games and attractions, parking and other services inside our parks, (iii) sponsorship, licensing and other fees, including revenue earned under international development contracts, and (iv) accommodations revenue.
(Company filings)
In the first half, Six Flags’ Park EBITDA declined (-)1.1% year over year to $177.1 million.
During the first six months of 2017, Park EBITDA decreased primarily as a result of a decrease in total revenue per capita coupled with an increase in cash operating costs partially offset by a 2% increase in attendance and a 7% increase in sponsorship and international licensing revenue.
Further, the reduction in total revenue per capita (representing total revenue divided by total attendance) was primarily attributable to the adverse impact of unfavorable weather, which impacts attendance mix, particularly one-day ticket sales, and the negative foreign currency impact related to the weaker Mexican Peso and Canadian Dollar.
The company’s cash operating costs increased primarily as a result of start-up and operating costs associated with Six Flags’ two new water parks in Mexico and California and the investments the company has made to successfully drive its international business. These increases in cash operating costs were partially offset by the weaker Mexican Peso and Canadian Dollar, which favorably impacted expenses.
Sales and profits
In the past three years, Six Flags had an average revenue growth of 5.9%, profit decline average of (-)0.07%, and profit margin average of 9.2% (Morningstar).
Cash, debt and book value
As of June, Six Flags had $68.3 million in cash and cash equivalents and $2.05 billion in debt with negative equity of (-)$554.7 million. As observed, overall equity dropped by $462.6 million year over year while debt increased by $396 million.
38.6% of Six Flags’ $2.54 billion assets were goodwill and intangibles while book value is at (-)$554.7 million compared to (-)$186.5 million a year earlier.
Cash flow
In the first half, Six Flags’ cash flow from operations declined (-)4.1% year over year to $132.9 million brought mostly by lower profits and higher outflows in its accrued interest payables and deferred income taxes.
Capital expenditures were $97.2 million leaving Six Flags with $35.7 million in free cash flow compared to $57.6 million a year earlier. The company also raised $26.8 million in share issuances and $355.4 million in debt proceeds net repayments.
Six Flags also provided 13.8 times its free cash flow in dividends and share repurchases including payments to noncontrolling interests.
The cash flow summary
In the past three years, Six Flags allocated $352 million in capital expenditures, raised $39 million in share issuances and $208 million in debt (net repayments and other financing activities), generated $977 million in free cash flow, and provided $1.26 billion in payouts (dividends and share repurchases) at free cash flow payout ratio of 130%.
Stock repurchase plan/s
From Six Flags’ November 2013 Stock Repurchase Plan through August 2016, the company repurchased 11,428,000 shares at a cumulative cost of approximately $500.0 million and an average price per share of $43.75.
Under the June 2016 Stock Repurchase Plan by April 2017, the company repurchased 8,392,000 shares at a cumulative cost of approximately $500.0 million and an average price per share of $59.58.
Conclusion
If not for Six Flags’ recent redemption of its 2021 notes and its related costs, the company would still have provided higher profits for its shareholders compared to a year earlier having discounted all of its obligations just in the first half of operations.
In review, Six Flags’ has yet to redeem $461.8 million worth of partnership units from its partners as mentioned earlier and also commit about $30 million or more each year in its arrangements as discussed earlier until 2028 at maximum length.
Meanwhile, the company-defined metric, Park EBITDA, also demonstrated lower figures in the first half brought by lower realized revenue secondary to corresponding revenue per capita. Higher costs and foreign currency impact also played some role in dampening this metric.
Some may anticipate higher figures in the coming quarter as the Summer season ends, but year prior figures indicate otherwise as Six Flag recorded (-)5% lower figures in its third quarter 2016 vs. 2015 results.
Six Flags also indicated a leveraged balance sheet with goodwill and intangible elements in it. Nonetheless, the company has provided significant if not more than its free cash flow to its shareholders in recent years.
Average analysts have an overweight recommendation on the company’s shares with a $65.80 target price vs. $53.12 at the time of writing. Using revenue estimates, three-year P/S average, and a 30% margin indicated a per share figure of $47.
Six Flags may have been an appealing investment if not for its high valuation, decade long obligations, leveraged balance sheet, and decent moat of business.
In summary, the company is a pass.
Notes
- Company filings
Our parks occupy approximately 4,500 acres of land, and we own approximately 800 acres of other potentially developable land. Our parks are located in geographically diverse markets across North America. Our parks generally 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, and thereby provide a complete family-oriented entertainment experience. In the aggregate, during 2016, our parks offered approximately 830 rides, including over 135 roller coasters, making us the leading provider of "thrill rides" in the industry
2. Company filings
These characters include Bugs Bunny, Dafy Duck, Tweety Bird, Yosemite Sam, Batman, Superman, The Joker and others. In addition, we have certain rights to use the Hanna-Barbera and Cartoon Network characters, including Yogi Bear, Scooby-Doo, The Flintstones and others. We use these characters to market our parks and to provide an enhanced family entertainment experience.
Disclosure: I do not have shares in any of the companies mentioned.
