Can This Park Operator "Amuse" Investors?

By Anh HOANG - October 26, 2012 | Tickers: FUN, SIX | 0 Comments

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It is always fun to ride a roller coaster in an amusement park. It is full of extreme surprises and excitement, mixed with anxiety. When it goes up, you never know when it’s suddenly going to come down, or twist, or keep going up. I think that is what investors have experienced with the stock of amusement park operators. Six Flags Entertainment (NYSE: SIX) has been climbing up continuously, from $27.70 to $64.70 within just a year. But, what goes up must up, must go down. Right after its third quarter earnings announcement, Six Flags’ stock price dropped as much as 10%, from $62.34 to $56.16 per share. 

Effectively, investors who have been investing in Six Flags for a year have realized an annualized return of 71.5%, even after 10% drop after earnings. Could this stock's roller coaster dive deeper? Or will it bounce back surprisingly? In a long run, it would depend on the business performance. So we need to look at the operating fundamental of the business to determine the attractiveness of this investment.

For the third quarter, Six Flags reported $485 million in quarterly revenue, 2% higher than the same quarter's revenue last year, $476 million. Its net income was $272 million, an impressive year-over-year growth of 29%. Its attendance grew 3%, to 11.5 million guests. However, the company mentioned that total guest spending per capita experienced a slight decrease, to $40.56, due to its success in having a higher mix of season pass attendance. In accordance with strong growth momentum, the company announced a 50% increase in its dividends, to $0.90 per share per quarter. In addition, it used $70 million of proceeds from the sale of its minority interest in Dick Clark Productions to repurchase $1.1 million common shares. To date, the company has used $168 million out of $250 million in 2012-2015 share-buyback plan.

Jim Reid-Anderson, the company chairman, president, and CEO proudly said: “Six Flags' strong momentum continues, driven by record-high guest satisfaction, innovative new attractions and great execution by our dedicated employees, our consistent performance and strong financial position allow us to increase our dividend by 50 percent to an annual dividend rate of $3.60 per share. We remain laser focused on delivering our aspirational target of $500 million of Modified EBITDA by 2015, which would equate to nearly $6 of cash earnings per share.”

Even with the strong growth performance, the $485 million revenue didn’t live up with Wall Street’s expectations of $514 million. High analysts’ expectations were reasonable as this amusement park business is highly seasonal. The company derived 80% of park attendance and its top line in the second and third quarter, and the busiest period was between Memorial Day and Labor Day (May – September).

Looking deeper into the its income statement, the significant growth in its net income was due to its disposal of minority stake in Dick Clark Productions, creating a one-time gain of $67 million, but this was booked into continuing operations. If this were deducted, the income from continuing operations before the reorganization, income taxes, and discontinued operations would be $209.44 million, instead of $276.4 million. That would represent only 4% growth compared to the third quarter last year.

Six Flags is the second biggest operators of amusement parks in the world, only after Walt Disney Parks and Resorts. Others are Cedar Fair (NYSE: FUN) and Universal Parks & Resorts. Walt Disney Parks and Resorts is a subsidiary of Walt Disney diversified worldwide entertainment company. It is one out of the five main segments including Media Networks, Park and Resorts, Consumer Products, Interactive Media, and Studio Entertainment. The peer-to-peer comparison would only be between Six Flags and Cedar Fair.

In terms of dividend yield, Cedar Fair seems to be more favorable than Six Flags. And it has a much higher return on equity. Nevertheless, the extremely high return on equity is due to the significant leverage that Cedar Fair employs, its debt is 24 times higher than its equity. Although Six Flags has a much lower D/E ratio than Cedar Fair's, but its interest coverage is less than that of Cedar Fair. Both companies indeed have enough interest coverage, but I do not think that would put them in a quite comfortable position to cover its interest expenses. Last, but not least, both of them have enjoyed a significant rise in their stock prices and they are selling quite expensive in the marketplace. As a value investor, I personally would not involve in both companies at the moment. 

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