Description

I am recommending a long position in Six Flags ("SIX," or the "Company") at a price of $32.50 per share. I believe the company is worth at least $50.00, or 54% upside from the current stock price.  SIX has a market capitalization of $1.8 billion and trades approximately $15 million a day, based on the last 30 days' average trading volume.  Please refer to aviclara181's excellent write-up on the Company written in August of last year for additional background.  I will echo some of his thesis points and update you on a few developments since his posting.  

Brief Description:  SIX is a global leader in regional theme parks, operating 19 parks in North America (17 in the U.S., 1 in Canada and 1 in Mexico.  The Company emerged from bankruptcy in April 2010 after it filed Chapter 11 in June 2009 under an unwieldy debt load.  The Company now has a significantly de-leveraged balance sheet and is under the leadership of new management, led by the proven turnaround specialist, James Reid-Anderson (formerly of Dade Behring).  The industry enjoys high barriers to entry due to the significant investment to construct parks ($300 mm+ per park, limited supply of real estate, zoning restrictions, etc.).  Regional theme parks are fairly resilient during weak economic times, as these types of parks offer good value relatively close to the home.  90% of SIX's guests travel within 150 miles of the park, and the majority travel within 50 miles. It is interesting to note that there have been significant insider purchases at both Six Flags and Cedar Fair (a comparable regional theme park operator) during the recent market turmoil -- I view this as an indirect indicator that regional theme parks' value proposition is indeed resonating well with consumers in the current environment.  Finally, as is typical with post-bankruptcy stocks, SIX is not followed closely by the investment community -- only 2 sell-side shops follow the company (Oppenheimer and Miller Tabak).  

I find SIX attractive for the following reasons:

New management team

New CEO and Chairman James Reid-Anderson joined SIX in August 2010.  Reid-Anderson is best known for stewarding formerly-unloved, diagnostic equipment maker, Dade Behring, out of Chapter 11 and into the arms of acquirer, Siemens, for a total return of 10x five years later. He is joined by his colleague from Dade Behring, John Duffey, who assumed the CFO role. Completing the C-level suite is recently hired COO Al Weber, who has 40 years of theme-park experience including a four-year stint as head of Paramount Parks, before its eventual sale to Cedar Fair.

What is different under the new leadership?  A key component of the old management team's (led by Daniel Snyder, owner of the Washington Redskins, and Mark Shapiro, former ESPN executive) strategy was to transform SIX into a national media/entertainment brand.  Under prior leadership, the company focused on national advertising featuring the octogenarian, Mr. Six.  The marketing focused much more on the Six Flags brand at the expense of what was new at the parks themselves.  Reid-Anderson and his team have done away with Mr. Six and this expensive brand advertising in favor of more direct, local advertising (TV, internet, radio, movie theaters) that focuses solely on the new rides available at the local park.  The new management team has also reduced the capital intensity of the business.  Management has guided the run-rate level of capex to be between $80-90 mm, compared to historical levels above $100 mm.  Prior to Reid-Anderson's arrival, capital projects were always dictated by corporate, not the local parks.  The local parks had no say on what (if any) new rides they would be receiving.  In addition, new projects were never competitively bid-out among suppliers which led to frequent cost over-runs.  Management also plans to periodically re-cycle rides across their different parks -- moving a ride from Chicago to New Jersey still classifies as "new product news" for the New Jersey customers and far less expensive than constructing a new ride.  Under new management, each park manager is now required to come up with their own capital project requests, justifying/ranking the expected returns and being held accountable for them.

As detailed in an 8K filed on 8/18/10, management is highly incentivized to grow EBITDA to $350 million in 2011. As part of the Board's "Project 350" program, CEO Reid Anderson will be granted 1.25% of the outstanding common stock (or 682,500 shares) if he achieves $350 million or more of Adjusted EBITDA in 2011 (off of a 2010 Adjusted EBITDA base of $275 million) AND he needs to maintain at least 97.5% of that $350 million in 2012 for the shares to vest.  He will receive 50% of the grant if he achieves $330mm, and 0% if he achieves anything less than $330mm.   Important to note:  these figures were calculated prior to the completion of 2010 and were based off of a 2010 Adjusted EBITDA of $275 million.  Actual 2010 Adjusted EBITDA came in at $295 million, and therefore all the trigger points for Project 350 are adjusted downward by $20 million for the over-performance in 2010.  So the $350 million is now $330 million.  Despite this adjustment, management continues to use $350 million as their goal for 2011.  

For the six months ended June 2011, SIX has grown EBITDA by 86% over the prior year six month period, and LTM EBITDA stood at $325 million. The Company's focus on back-to-basics advertising and pricing strategy (see below) appear to be doing very well.  Further proof of their current and future success can be found in their advance season pass sales, which are up double digit % (in units) for the first six months of 2011.  They do not disclose what the % increase is in dollar terms but they have indicated that they have not discounted season passes to achieve that result.  The new management team has done an equally effective job on costs.  They have eliminated significant excess corporate overhead from the prior regime, including expensive real estate in Manhattan (part of old management's aspirations of becoming a national media powerhouse).  The full annual benefit of the costs taken out has yet to be shown on the P&L, and the Company has guided to operating expenses to being slightly down in 2011.  On a go forward basis, I expect the Company to continue to take a ruthless approach to managing costs and expect costs to grow in the low single digits in 2012 and beyond.  

Lastly, management is putting their money where their mouth is.  There have been significant levels of insider buying (real out-of-pocket, open market purchases) from various executives and board members.  Below are just a few of the recent insider purchases made in recent months:

• James Reid-Anderson (CEO)
  • 8/5/11 - 78,645 shares @ $31.78 = $2.5 million
• Jon Luther (Director)
  • 8/11/11 - 2,500 shares @ $32.14 = $80,350
• John Baker Wilson (Director)
  • 8/8/11 - 1,000 shares @ $30.88 = $30,879
• Lance Balk (Executive Vice President, General Counsel)
  • 8/5/11 - 4,593 shares @ $31.39 = $144,174
• Richard Roedel (Director)
  • 5/10/11 - 3,000 shares @ $38.45 = $115,355
• John Duffey (CFO)
  • 2/25/11 - 28,000 shares @ $30 = $840,000

Multi-year pricing opportunity

The largest driver behind increased earnings power will be what the Company believes to be a multi-year pricing opportunity.  The Company is planning on moderate price increases over the next several years, driven primarily by the "fencing-in" of discounts.  Moderate price increases have a significant impact on the P&L - with a largely fixed cost structure, practically all of the increase flows through to the bottom-line.  The industry is heavy on promotions, as practically nobody pays the full cover price.  Historically, discounts for SIX tickets could be found in multiple channels (Coke cans, internet, local supermarkets, etc.), and often the size of the discounts would vary by channel.  Naturally, the customer would cherry-pick the largest discount.  The Company is  harmonizing the discounts and varying the discounts based on off-peak/peak periods, thereby improving realized ticket yields.  One metric that management is paying close attention is the discrepancy in ticket revenue per cap between themselves and Cedar Fair.  SIX's ticket per cap is $3.90 per cap below Cedar Fair (16% below), and management believes SIX's should be higher given the DMAs in which SIX operates.

For the first six months of this year, per capita admissions revenue is up 9%.  Per capita guest spend, which includes admissions + in-park food and merchandise is up 8%.  Meanwhile, attendance is slightly up, despite the company having 19% fewer operating days during Q1 2011 and 5% fewer operating days in Q2 2011.  So thus far, the price increases have not turned people away from the parks.      

On the last earnings call, management also introduced their aspirational goal for 2015 Modified EBITDA of $500 mm.  Using actual 2010 results, this would imply a 5-year CAGR of 9%.  While management gave no specifics on the major building blocks other than clarifying that it would be all organic growth, my view is that they plan to get there based on continued moderate pricing improvements coupled with disciplined cost management.

Likely return of capital in the near term

SIX generates the vast majority of their annual FCF in the 2nd and 3rd quarters of the year.  Based on my numbers, I have them generating $202 mm of FCF ($3.60/share) in 2011.  Given the seasonality, over $220 mm of FCF will come in the back half of this year.  In recent Q&A forums at conferences, the CEO has suggested they would address capital return decisions at the end of this year after the generation of this free cash flow. Thus far this year, the Company has repurchased 1.2 million shares for $41.5 million ($34.58 per share).  The Company is restricted by their existing credit facility to repurchase more shares.  My sense is that they will seek to refinance their credit facility, using a solid 2011 EBITDA as the new run-rate. The existing credit facility was established as they emerged from bankruptcy, and we expect them to be able to arrange a much friendlier facility as the Company gets re-legitimized.  With a new credit facility, I expect them to repurchase more shares and to raise their annual dividend, which is currently at $0.24, or 0.7% yield.  

Hidden assets

• NOL:  SIX emerged from bankruptcy with $1bn of federal NOLs, which I value at $350 million or greater than $6/share. As a result of these federal NOLs, SIX will only be paying $10-15 million/year in annual cash taxes for the next 6-7 years.  
• Excess land:  SIX owns ~1200 acres of excess real estate around its New Jersey park and another ~200 acres of excess real estate around its Washington D.C. park. These plots of land could be sold or used to develop hotels in the future. I am not assigning any value to these assets.
• Dick Clark Productions: SIX owns 39% of the equity of Dick Clark Productions.  Dick Clark Productions ("DCP") is a producer of TV programming, such as the "American Music Awards", "Golden Globe Awards", "Dick Clark's New Year's Rockin' Eve", "So You Think You Can Dance" and "Shaq VS".  I have yet to glean much financial information about DCP.  The data points we do have are the following.  In September 2010, SIX received a $41 million cash distribution with respect to a recapitalization of DCP.  The Company's ownership in DCP did not change as a result of the distribution.  In addition, the Company has mentioned that DCP is contributing roughly $5 mm in EBITDA, which is included as an offset within the line item "3rd Party Interest in EBITDA".   I am not assigning any value to DCP in the valuation.

Financials

I project SIX to generate $3.60 of FCF per share in 2011.  It is important to highlight that the FCF is benefiting from minimal cash taxes from the NOL (see above).  The way I prefer to look at valuation is to assume SIX is a full cash tax payer but give credit for the present value of the significant cash tax savings from the NOL.  On this basis, SIX trades at 9.1x fully-taxed FCF.  On an EV basis (projected balance sheet at the end of 2011 and deducting the NOL value from EV), SIX trades at 6x 2011 EBITDA and 7.9x 2011 EBITDA less all Capex.  

I believe a reasonable target multiple would be 15x my fully-taxed 2011 FCF, especially in light of the Company's stated aspirational goal for 2015 Modified EBITDA of $500 million, which if achieved, would imply healthy a high-single digit EBITDA CAGR between now and then.  As shown below, one can get to $500 million of Modified EBITDA using very little attendance growth, modest annual revenue per cap increases and moderate expense growth.  At 15x my fully-taxed 2011 FCF, the stock would trade at $50.  

Risks:

• Recessionary environment - Regional theme parks are recession resistant and plays well into the "stay-cation" theme, but it is hard to argue that regional theme parks will not be negatively affected should consumer discretionary income take a significant hit.  The high single-digit multiple off of run-rate FCF, coupled with management's disciplined approach to costs, should limit the downside in a more extreme economic environment.
• High amount of seasonality - SIX makes most of their money in the 2nd and 3rd quarters.  Given it is an outdoor concept, SIX's results can be positively/negatively affected by the weather.

Catalyst

• Continued significant improvement in operating results will help re-legitimize the Company post bankruptcy emergence
• Strong potential for additional return of capital by the end of this year
• Improved sell-side analyst coverage