Monday, November 13, 2006

Looking to load up on Six Flags (NYSE:SIX)

For a some time I’ve followed amusement park operator Six Flags (NYSE:SIX). The co has been in serious trouble, but recent mgmt changes may bring new life.

Several years ago, when grass was greener and snow was whiter Six Flags decided to start expanding like a m*****f*****. The co borrowed billions to open new amusement parks. Then all the sudden (as always), things didn’t go as they were supposed to go. And the co found itself heavily debted, and with declining attendance.

After few years of struggle, famed investor Danile Snyder decided to jump in and turn the ship around. The mgmt initially opposed Snyder suggestions, even issuing a poison pill, but at the end of last year he was named co’s Chmn and his buddy Mark Shapiro as CEO.

Currently the co has 26 parks in US, 1 in Canada and 1 in Mexico plus Darien Lake campground and soon to be opened Great Escape Lodge. It has 2.33bn in debt and virtually all its cash flow goes into paying interest on that debt. Now, the new mgmt has decided to sell some parks in order reduce debt. Currently the co is in talks to sell six theme parks. Bloomberg reported last week that there are two bidders for those six parks, with current bids at about $650m. While this is under what analysts expected ($800m or so), it still shows, how much the co is worth on a sum-of-parts basis. With 6 parks at $650m, it implies a value per park at around 110 million. That suggests 30 parks may be worth at least $3.3bn. Of course, value of the parks vary big, but it gives us at least some indication. Also, it is possible that the co has been looking to sell their weakest performing parks, meaning the remaining parks are worth even more. Six Flags' mkt cap stands at $573m, plus debt of $2.33bn, totalling $2.9bn in enterprise value. However, selling all parks is unlikely and makes no sense, as the parks in total generate nice profits.

The co reported its Q3 results on Nov 2, with revs at $540.7m (above analyst consensus) and EPS of $1.06 (below consensus). However, Friedman Billings Ramsay noted in their review that this was not a big surprise as they had clear indications that it was going to be a challenging quarter. Also, the stock's performance (YTD low) indicated low expectations.

Recently, the co has made steps to improve the performance of their parks and plans a big advertising campaign in 2007 (note the co’s business is highly seasonal with second and third quarter generating most of the revenue and profits). There are some indications that visitors (especially families) have started to spend more money at SIX's parks.

Conclusion: If the co manages to sell some of its parks (six at least), it can reduce its debt load rather drastically. In doing so the co’s shares will get a much needed boost.

Target price: This years high of $12 sounds a bit too optimistic, so I would sell the stock at around $8 or after next season (3Q07).

Disclaimer: Looking to load up on Six Flags, around $6.

1 comment:

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