Feb 26 2020 - Six Flags: All-Aboard For A Bullish Comeback

Summary

SIX reported a continued total revenue growth year-on-year (YoY), from 2009 to 2019.

Surprise losses have just plunged the stock into a deep correction due to a major dividend cut, and its CFO retiring.

Six Flags’ overall long-term growth prospects are still intact, in line with its regional dominance and global expansions.

The overall reaction to surprise losses is exaggerated, which provides a unique opportunity to ride on the stock's impending rally after the dust settles.

Six Flags Entertainment Corporation (NYSE:SIX) has shown incredible resilience with 58 years of amusement on its belt of world-class rides, themed water parks, and unique attractions.

With the world's biggest regional amusement park organization commanding North America, it currently infringes on building the brand outside, which leaves it a lot of space to develop and accomplish in excess of a bullish rebound.

Prospects of a bullish comeback for SIX is well on track with its brand new attractions presented to guests annually, coupled with affordable pricing dynamics aiming to corner a huge chunk of the market. SIX has also shown uniform development throughout the years, with a steady track record of increasing yearly revenue from 2009 to date, ending with almost 1.5 billion USD in revenue for FY 2019, as shown below.

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Source: Six Flags Growth Drivers

FY 2019 revenue growth was mainly due to a 2 percent increase in guest attendance - owing to the main five domestic parks that started operations in mid-2018 and a newly minted waterpark that started the last 2nd quarter of 2019.

SIX Bullish Drivers

With the theme park putting innovation at its heart and being deeply rooted in the industry, about 9% of total annual revenue is steadily funneled into the improvement and debut of rides and attractions yearly.

Through a developing dynamic base of individuals and season pass holders, annual revenue and cash flow are being consistently reliably upwards, with members producing altogether a greater number of benefits than single-day guests.

Membership offers a steady recurring revenue stream that provides the theme parks’ most profitable and loyal guests. A clear upward trend is shown below regarding guest spending per capita from 2009 to 2019.

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Source: Six Flags Investor Presentation Oct 2019

Expansion-wise, the company also has signed agreements with associates in other countries like Dubai, China, and Saudi Arabia, ensuring that long-term growth prospects and global presence is within reach. Twelve parks overall have been signed in China and Saudi Arabia, leading to a rosy growth prospect, especially with the rise of the middle-class population leaning towards entertainment.

The theme park also boasts its licensing agreement with DC Comics and Warner Bros., providing them with leverage to introduce their most popular icons to their guests.

Besides the exciting adventures in the park, guests are provided with impressive choices of food, souvenirs, and games spread throughout.

In expanding its culinary base, Six Flags has entered a multi-year partnership with The Kraft Heinz Products. The company expects to convey mainstream best-tasting items from the Kraft Heinz portfolio like their well-known HEINZ Ketchup, KRAFT Dressings, and KRAFT Cheese Slices.

With regards to Six Flags’ profitability, it provides compelling value relative to other forms of entertainment, since consumers now tend to gravitate to experience-based entertainment. SIX has also cornered the “cheaper tier” portion for theme parks, while Disney (NYSE:DIS) concentrates on the “expensive tier” portion for theme parks. Meaning that SIX will likely benefit from a much affordable rate, leading to a higher guest count.

Surprise Releases

Meanwhile, SIX has fallen at about ~50% off from its 2019 highs at 60.00, and is now trading at around the 31.00 to 32.00 range. With a correction driven by the announcement of a first major dividend cut for this quarter- from 83 cents a share last quarter to just 25 cents a share this quarter. The theme park operator provided a downbeat 2020 guidance due to a surprise loss from its international development agreements.

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Source: SIX - Six Flags Entertainment Corp Profile

Six Flags’ partner in China, Riverside Investment, defaulted on payment and cost the company dearly, leading to a forced dividend cut to sustain the long-term interests of the company and its shareholders.

The theme parks venture in the Chinese market abruptly ended due to difficulties from the current risk-averse sentiment in China and a regressing real estate market. The management also revealed that no revenues will be realized from its China venture and SIX will instead shoulder an operating expense loss and one-time charges after the termination of the projects.

Overall, the decision for a major dividend cut was well-intended in order to cover sustainable free cash flow, more liquidity, and additional options for the company to prosper.

SIX also announced that their chief financial officer and executive vice president, Marshall Barber will retire from the company right around mid Q3 of this year, further exacerbating the current correction from its highs.

SIX is also currently facing challenges related to its base business due to increasing operating costs caused by an increase in market wages this year. The management aims to offset this using a steady inflow of investments to broaden the whole theme park experience.

Final thoughts

SIX just underwent a deep correction despite its steady growth and performance YoY, with the current pullback driven by a couple of surprises - namely the retirement of their chief financial officer, and a dividend cut imposed to face its headwinds from a failed development agreement with a Chinese associate. With a dive this deep due to fears and panic, it presents a unique opportunity to take advantage of the company's impending bullish comeback after the fog clears out this year.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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