Kubrak78
Six Flags (NYSE:SIX) is a theme park operator with 27 theme parks in its portfolio: 24 within the US, 1 in Canada, and a pair of in Mexico. Previously few years, Six Flags has skilled a number of adjustments in administration and a big change in enterprise and capital allocation technique. The adjustments caused by present administration are considerably totally different from previous administration. Firstly, whereas previous administration had centered on buyer quantity, present administration focuses on buyer worth. Secondly, the kind of capex spend has modified from larger capital-intensive initiatives resembling thrill rides, to decrease capital-intensive gadgets resembling seasonal occasions and park beautification. Thirdly, capital allocation has now shifted from a shareholder-friendly return by dividends and share repurchases, to debt-reduction and restrained share repurchases.
In analyzing the adjustments caused by the present administration, I consider that Six Flags is in a terrific place to enhance its enterprise and thereby improve its inventory value sooner or later.
Temporary Overview of Administration Modifications
As a client, I completely hate curler coasters. I view them as a human blender: you get strapped onto a machine, get tossed and circled in speeds unbecoming for a human physique. The identical feeling may very well be felt in the event you owned SIX inventory lately. From 2017 to at present, the corporate has skilled a lot turbulence and disruptions, from repeated adjustments in administration, to a 180 diploma change in technique and capital spending. Between 2017 to at present, there had been 3 CEOs:
Pre-Nov 2019: Jim Reid-Anderson (Aug 2010 – Feb 2016; Jul 2017 – Nov 2019)
Nov 2019 – Nov 2021: Michael Spanos, beforehand CEO of a PepsiCo division.
Nov 2021 – At present: Selim Bassoul
On this article, I’ll continuously use phrases resembling “outdated/earlier administration” and “new/present administration”, and the time interval “Earlier than” and “After”. References to “outdated administration” and the “Earlier than” time interval refers back to the staff underneath Jim Reid-Anderson, whereas “new/present administration” and the “After” interval refers back to the present staff underneath Selim Bassoul. There might be restricted point out on the administration staff underneath Michael Spanos, since this time period coincides principally with Covid-induced efficiency/lack of efficiency. As such, Michael Spanos’ time on the helm can largely be seen as a transitory interval. However, he deserves credit score for managing the enterprise by the one most catastrophic interval confronted by the corporate prior to now decade (Six Flags’ different catastrophic occasion, its chapter, occurred over 10 years in the past, in 2009). On account of the actions (or inactions) he carried out throughout his interval, Spanos’ time will largely be included with present administration’s.
Earlier than Jim Reid-Anderson left the agency, his final feedback have been very a lot upbeat, touting the efficiency all through his time within the firm. Throughout his tenure, income elevated by 75%, and the corporate’s inventory value rose 3.6x from ~$9.50 on the finish of August 2010 to ~$44 on the finish of November 2019. Together with reinvested dividends (which totals to $20.28), an investor would have realized a 647% revenue if that they had held all through Jim’s tenure. In the identical interval, the S&P 500 returned 243% with dividends reinvested. That’s an alpha of over 400%. One may simply say that his tenure was very rewarding to shareholders.
Nonetheless, when Michael Spanos took over, the tone of the earnings name all of the sudden modified. While Jim Reid-Anderson celebrated the success of his technique of promoting Annual Passes, Spanos sang a special tune. Natural attendance development was a measly 0.2% (90% of the attendance development of two% had come from newly acquired parks), adjusted FCF dropped 16%, Challenge 750 (a aim of reaching $750M Modified EBITDA by 2020) was referred to as off for being unrealistic, dividends have been reduce by 70% (83c to 25c per quarter), their partnerships with Riverside Group (China partnerships) had failed, and the corporate was experiencing working deleverage (prices have been rising quicker than revenues). Quickly after, Covid hit, and their parks primarily became a barren wasteland. Sid Flags was firmly in disaster mode: no extra dividends, no extra share repurchases, and extra debt to strengthen their steadiness sheet sufficient to not go to chapter once more (recall that Six flags had as soon as filed for Chapter 11 in 2009).
As Covid handed, so did the administration staff. In November 2021, Selim Bassoul took over as CEO. His background wasn’t a typical match to Six Flags; he was CEO and Chairman of Middleby, a producing agency within the meals providers trade whereas on the similar time, a non-executive chairman of Six Flags’ board. However, inventory costs reacted positively, gaining 7.6% within the days following the announcement. Since then, he has made a sequence of adjustments, together with slashing SG&A prices by 18% in his first full 12 months (FY22 vs FY19) and enacting a totally totally different technique from Jim Reid-Anderson. As tectonic shifts go, not everybody was on board with the brand new technique. In a single occasion, the corporate’s workers allegedly (as a result of it may possibly’t be totally confirmed) wrote an open letter citing Selim’s lack of management and criticism of his technique. There may be even a YouTube video with over 1,000,000 views which berates the present administration staff in comparable nature. In brief, the frustrations centered upon:
Low morale & workers laid off – “He eradicated layers of staff members…and now has all of the Park Presidents reporting on to him”
Decreased site visitors – “Our attendance has been abysmal and lots of of our company gained’t be returning”
Lack of high quality – “We’re charging our company extra and providing far much less”
That stated, let’s discover the adjustments that the present administration has introduced upon the corporate, and the way it interprets to the worth of the corporate at present and sooner or later.
Define of technique change:
Kind Earlier than (2013 – 2019) After (2020 – 2022) Income technique Recurring income Attendance development Increased spending per capita Increased-value clients Capex Enlargement Extra theme parks Extra rides Buyer-facing efficiencies Visitor facilities Extra occasions Capital allocation Dividends Share repurchase Debt discount Share repurchase Click on to enlarge
Income technique
Earlier than:
The concentrate on the prior technique was in promoting Annual Passes and limitless meal plans. The thought was to cram as many individuals as doable and generate incremental income from every new customer. Since there may be negligible marginal price on rides (maybe simply barely elevated utility prices and upkeep prices), having extra individuals paying to get into the parks meant that each incremental income generated falls properly to its backside line. The identical was for meals, since meals margins can safely be assumed to be excessive, as COGS as a % of non-sponsorship income stays low at 8.2-9.4% (excluding Covid-impacted 2020). The identical was for different forms of spending one may incur in a theme park: parking charges, merchandise, and so forth.
And the technique labored. From 2013 by 2019, park revenues income grew 32.3% on the again of attendance development of 25.5%. Elevated attendance additionally helped the corporate develop its non-park revenues (sponsorships, worldwide agreements, lodging) by 64.5% by the identical interval, till it reached 6.5% of whole revenues in 2019. In spite of everything, sponsors have been extra prepared to spend after they can get in entrance of extra eyes.
Promoting annual passes additionally meant that Six Flags may considerably normalize their revenues. Now not would they should fear a few drop in income on account of climate occasions since Annual Go clients who had already paid for his or her passes would not really feel cheated for choosing to return on a foul day. They might come once more on one other day with out paying once more. Annual passes gave the corporate a foundation of confidence in attendance numbers and recurring income as annual go holders usually prolong their passes. It actually appeared like a SaaS firm: recurring income, stable base of customers/clients, negligible marginal price, with any and all incremental income dropping to the underside line.
After:
Nonetheless, it’s not. As a lot as their income technique was SaaS-like, their enterprise was not. It’s extra just like a health club. When you can smush many individuals into the health club, if there’s just one treadmill, just one individual may go at a time. In SIX, it got here out to this: longer waits for rides, longer waits for meals purchases, dirtier bathrooms, much less resting areas and so forth. High quality is compromised because of amount. The identical was for meals. In selling their Annual Passes, outdated administration had additionally promoted closely on their meal plans. This led to some clients gaming these passes.
With new administration, the technique has been encapsulated within the horny new time period, “Premiumization”. What this primarily means is elevated costs. By rising costs, Six Flags filters out lower-spending clients in favor of higher-spending clients. As adjustments in methods go, this can be a full 180 diploma flip. In comparison with the earlier administration group which focuses on rising attendance whereas waving c’est la vie to spending per visitor, the present administration locations a terrific emphasis on rising spending per visitor even at the price of attendance. The outcomes are proven under. For the sake of normalization, I’ve taken out 2020 in its entirety on account of Covid impacts.
Assessment:
A drop in income as proven within the desk under means that the corporate’s new technique is failing. Moreover, whereas the decline in park revenues within the 4 years following Jim Reid-Anderson’s departure might level to the brand new technique not working, this isn’t the case. Buyers ought to word that whereas the comparisons above means that the brand new technique is failing after 4 years (2019 vs 2022), the technique change had actually solely began in 2021. Even then, 2021 efficiency was nonetheless impacted by Covid and a brief extension of the low renewal value for Annual Passes (outdated administration’s technique). Then in 2022, excessive gasoline costs and rampant inflation impacted their efficiency. It was, by all accounts, a ‘transitionary’ interval between the outdated and new methods. Extra time is required to guage the success of present administration’s technique.
2019 2022 Change % Complete Revenues 1,487,583 1,358,236 -8.7% Park Revenues 1,390,222 1,306,380 -6% Non-Park Revenues 97,361 51,856 -46.7% Click on to enlarge
Supply: SEC 10k Filings. All values in ‘000s.
Digging a bit of additional, buyers ought to see a silver lining with Six Flag’s newest outcomes. As proven within the desk under, the present technique has succeeded in fueling a 50% improve in visitor spending amidst excessive inflationary atmosphere. With this in thoughts, buyers must be happy, or no less than quickly appeased, by the results of the present technique to this point. Then again, attendance has taken a giant hit. To this finish, the subsequent part will discover how the corporate plans on gaining again attendance by its new technique on capital expenditure.
Earlier than (2013 vs 2019) After (2019 vs 2022) Attendance (in ‘000s)
26,149 → 32,811+25.5%
32,811 → 20,434-37.7% Spending per capita (in $) $42.08 → $42.37+0.7% $42.37 → $63.93+50.9% Park revenues (in $M) $1,390 $1,306 Change % (Earlier than vs After) -6% Click on to enlarge
Capital Expenditures
Earlier than:
In listening to earnings calls by outdated administration, the main focus had been on buying new parks, worldwide licensing (which finally failed), and constructing extra rides. By our rely (per firm 10-Ks), between 2013 to 2021, the corporate has added no less than 92 rides and opened no less than 8 new theme parks (together with water parks), along with 29 rebrandings and different points of interest (e.g. elevated cabanas, household areas, and so forth.). Via this era, the corporate spent over $1.09 billion on capex (which incorporates upkeep). In rising the variety of theme parks and rides, Six Flags was capable of match extra clients to extra rides.
After:
In the meantime, for the previous few quarters, CEO Selim Bassoul has modified the character of the dialog. Extra particularly, there was a shift in capex spend to park infrastructure and beautification. This has been repeated a number of instances all through the previous few earnings calls:
4Q22 Earnings Name:
“…our 2023 CapEx program is targeted totally on park infrastructure and beautification”
“Elevated emphasis on enhancing the facilities and infrastructure in our parks, including new and thrilling rides, occasions and points of interest, and implementing visitor dealing with know-how”
3Q22 Earnings Name:
“First, we guess that we may improve the park expertise by investing in our infrastructure… “
“we discovered that we had underinvested in our park in relation to the beautification, the landscaping, the flowers, the cleanliness, the benches, the facilities, the meals”
2Q22 Earnings Name:
“[Our] parks’ look has improved as they’ve obtained their largest makeover of the previous few many years, [headlined] [ph] by our new entrance gate and lengthening to our restrooms and bogs”
“[Guest] facilities…we moved rapidly to improve our park infrastructure to reply to our visitor suggestions, however we aren’t stopping there. Visitor facilities are a prime precedence for our capex spend over the subsequent few years”
The desk under reveals a number of the initiatives based mostly on the brand new administration’s technique:
Class Examples Efficiencies
Single-rider lanes (1Q22)
Cellular fee know-how (Google Pay, and so forth.)
Visitor facilities
Extra clear bathrooms
Extra benches and shaded areas (non-revenue producing)
Extra cabanas (income producing)
Digital boards exhibiting wait-times
Park beautification
Elevated park hours
Higher meals
Seasonal occasions
Children Boo Fest (Mid-Sep to Finish Oct)
Oktoberfest (Mid-Sep to Finish Oct)
Veterans Day (2-3 days round 11 Nov)
Viva la Fiesta! (7-22 Might)
Rock the Block
Mardi Gras (Mid to finish Feb)
Brews & Bites (final week of April)
Coasterthon Celebration
Income-generating initiatives
Extra pop-up shops
E-gaming
Click on to enlarge
Supply: Firm 10k Filings, earnings calls, firm web site.
Assessment:
The character of the calls and the concentrate on capex has modified. From a technique centered on constructing new rides, forming worldwide partnership agreements, and buying new parks, the technique has now modified to shift spending to much less thrilling however however essential points: ‘tender’ park enhancements and different much less capital-intensive expenditures. The capex focuses on rising park facilities and general enjoyment elements in order that clients can discover larger worth in visiting Six Flags in hopes of accelerating natural attendance in future years. Thus far, administration expects to spend rather more on capex within the subsequent few years ($150M in 2023, $150-200M in 2024 and 2025) as in comparison with the previous (2013-2021 common of $120M). The shift in concentrate on capex has not translated to administration’s desired attendance (20.4M vs goal of 25M to 27M yearly). Nonetheless, based mostly on the drastic improve in visitor spending as proven above, I’m optimistic that the spending will allow the corporate to fulfill its attendance objectives as company expertise the enhancements across the parks and return for the expertise.
Capital Allocation
Earlier than:
Earlier administration has been very beneficiant on returning capital to shareholders. Between 2013 and 2019, annual dividends elevated from $1.84/share to $3.29/share. Via this era, the corporate has returned $3.34 billion to shareholders in share repurchases and dividends. This equates to a repurchase of ~10.8% shares excellent, and $17.34 in dividends per share. A mix of share buybacks and elevated dividends was music in its buyers’ ears, as inventory costs went from ~$31 in 2013 to a excessive of ~$73 in mid-2018, earlier than ending 2019 at ~$45. Even when one have been to overlook promoting the inventory at its excessive and maintain SIX shares from 2013, when it was priced at ~$31, to 2019, they might have realized a 100% acquire (~$14 in inventory appreciation and $17.34 in dividends).
Nonetheless, these returns to shareholders have include a price. Whereas administration can’t actually be faulted for accruing debt to return worth to shareholders (rates of interest over this span averaged out at a measly 2.3%), their actions weren’t prudent. Within the means of returning stated $3.34 billion to shareholders, internet debt elevated by $870 million. Which means that the corporate was funding its dividends and buybacks partially by issuing extra debt. The prudent factor to do would have been to make use of stated money to pay down its debt. On account of the earlier administration’s mismanagement (pun meant), when Covid struck, the corporate discovered itself ready the place they have been compelled to borrow much more cash to maintain their operations going, with internet borrowings of $357M in 2020. These actions by previous administration which appeared shareholder-friendly weren’t business-friendly. The music had stopped.
Capital Allocation 2019 2018 2017 2016 2015 2014 2013 Dividends 278,951 267,044 227,101 220,314 200,957 184,300 176,171 Share repurchases 52 110,990 499,442 211,751 245,114 195,353 523,589 Returns to shareholders 279,003 378,034 726,543 432,065 446,071 379,653 699,760 Cumulative returns 3,341,129 3,062,126 2,684,092 1,957,549 1,525,484 1,079,413 699,760 Internet debt 2,100,705 2,061,904 1,943,682 1,512,336 1,402,732 1,303,551 1,229,470 Internet debt change 38,801 118,222 431,346 109,604 99,181 74,081 0 Cumulative change in internet debt 871,235 832,434 714,212 282,866 173,262 74,081 0 Click on to enlarge
Supply: SEC 10k Filings; Values are in ‘000s
These unhealthy choices on capital allocation have now turn out to be a drag to their monetary efficiency at present. In 2022, SIX paid $146M+ for curiosity expense alone. To place this in context, SIX’s curiosity expense is (i) equal to over 1/tenth of their income, or (ii) larger than their capex in yearly since 2013, or (iii) practically as a lot as their SG&A prices excluding stock-based compensation. Who knew that taking over debt would prove badly?
After:
The excellent news is, the times of beneficiant dividends are behind them. Administration’s focus is now on strengthening the corporate’s steadiness sheet by debt discount, while nonetheless returning worth by share buybacks. That is evident within the decline in debt and dividends, and a unbroken however subdued share repurchase over the previous 12 months. The tables under offers a consolidated view of Six Flag’s debt profile from 2013 to 2022 and dividend and share repurchase quantities from 2019 as much as 2022.
Debt 2022 2021 2020 Complete Debt 2,380,531 2,629,524 2,622,641 YoY Change in Debt -248,993 6,883 0 Cumulative Change 242,110 6,883 0 Click on to enlarge Capital Allocation 2022 2021 2020 Dividends 200 813 22,499 Share repurchases 96,774 5,295 54 Returns to shareholder 96,974 6,108 22,553 Cumulative returns 125,635 28,661 22,553 Click on to enlarge
Supply: SEC 10k Filings. Values are in ‘000s.
From the tables above, you possibly can see just a few important adjustments:
Dividends are successfully eradicated (2013-2019 avg: $222M/yr)
Debt is being paid down early (2022 vs 2021 whole debt: -$249M)
Repurchases are restrained (2013-2018 avg: $298M/yr)
The actions taken by present administration will be seen as much less investor-friendly, however the reverse is true. By withholding money which had traditionally been used for dividends and share repurchases and utilizing that money to pay down its debt, the corporate has successfully saved ~$56.865M in money curiosity by the lifetime of the debt ($250M x 7% x ~3.75 years, much less 3.5% premium on early redemption). In taking these steps, administration strengthens the corporate’s steadiness sheet for the long run.
Assessment:
Publish-2019, the corporate has spent ~$102M in share repurchases. Whereas I’m a giant fan of corporations utilizing share repurchases as a method to return worth to shareholders, at this second, I’m not a fan of Six Flags doing so. In gentle of present rates of interest (and far to do with our conservative method), I a lot favor that firm focuses on pay down its debt and droop their share buyback program altogether no less than quickly. However, I’m happy that the present administration is taking extra prudent steps on strengthening the enterprise for the longer term.
Valuation
Valuation Relative to 2019
Evaluating present EV/FCF to 2019, the corporate trades at a 20% low cost at present relative to 2019. A part of this has to do with the valuation bubble popping post-covid, and the opposite is due the uncertainty within the success of present administration’s technique. Amidst the decline of revenues and finally FCF, the decline in inventory value has been a lot larger. This presents a possibility to buy SIX shares at a less expensive value than in 2019.
2022 2019 EBIT 342,129 425,062 Add: D&A 134,067 118,230 Much less: Capex -116,589 -143,913 Add: Loss on debt extinguishment (non-cash) 17,533 6,484 Add (Much less): Different bills (revenue) 4,126 2,542 Unlevered FCF 381,266 408,405 Click on to enlarge
Supply: SEC 10k Filings; All values in ‘000s.
Mar 13, 2023
Dec 31, 2019
Inventory Worth 25.14 45.11 Shares excellent 83,178,294 84,633,845 Market cap 2,091,102,311 3,817,832,748 Market cap* 2,091,102 3,817,833 Add: Complete debt* 2,379,220 2,274,884 Much less: Money & equivalents* 80,122 174,179 EV* 4,390,200 5,918,538 EV / FCF 11.52x 14.5x Click on to enlarge
Supply: SEC 10k Filings; * denotes values in ‘000s.
Comps Valuation
In conducting a comparable valuation, I might be utilizing two comparable corporations: Cedar Truthful (FUN) and SeaWorld Leisure (SEAS). Whereas these two corporations serve barely totally different demographics (extra kids and family-friendly), they’ve the same enterprise mannequin of working theme parks and are of comparable measurement. This makes them one of the best comps to worth in opposition to Six Flags.
FY 2022 SIX FUN SEAS EBT 200,539 371,657 390,073 Add: Curiosity Expense 141,590 151,940 117,501 EBIT 342,129 523,597 507,574 Add: D&A 134,067 163,549 152,620 Much less: Capex -116,589 -183,352 -200,705 Add (Much less): Different expense (revenue) 4,126 3,608 -43 Add (Much less): One-time expense (revenue) 0 -155,250 0 Add: Loss on debt extinguishment (non-cash) 17,533 1,810 0 Unlevered FCF 381,266 353,962 459,446 Click on to enlarge
Supply: SEC Filings; Values are in ‘000s
FY 2022 SIX FUN SEAS Inventory value 25.14 44.77 57.28 Shares excellent 83,161,736 51,930,650 63,919,409 Market cap 2,090,686,043 2,324,935,201 3,661,303,748 Market cap* 2,090,686 2,324,935 3,661,304 Add: Debt* 2,380,531 2,268,155 2,111,059 Much less: Money & Equivalents* 80,122 101,189 79,196 EV* 4,391,095 4,491,901 5,693,167 EV/FCF 11.52 12.69 12.39 EV/FCF relative to Six Flags 1.00 1.10x 1.08x Click on to enlarge
Supply: SEC Filings; * denotes values in ‘000s
Word: Cedar Truthful, SeaWorld and Six Flags studies their numbers barely in another way, so I standardized their codecs to higher present a line-item comparability.
Six Flag’s EV/FCF a number of is barely decrease than its friends, which means that Six Flags is barely cheaper than its friends. I consider that the market locations a slight low cost to Six Flags as a result of U-turn in technique that the present administration is implementing, and the uncertainty that it holds. As proven under, Six Flags skilled drastic adjustments wildly exceeding its friends in each instructions. This makes valuing the corporate a way more troublesome job.
SIX
FUN
SEAS
No. of Parks
27
13
12
Park Income per Visitor
2022
$63.93
61.65
78.91
2019
$42.37
48.32
61.80
Change %
50.89%
27.59%
27.69%
Attendance
2022
20,434
26,912
21,939
2019
32,811
27,938
22,624
Change %
-37.72%
-3.67%
-3.03%
Click on to enlarge
In evaluating park income per visitor in 2019 vs 2022, Six Flags’ income change is over 23 share factors larger than its friends. Out of a complete improve of over 50%, about 22% of this comes from simply the previous 12 months (2022). This drastic change caused sticker shock to Six Flags clients, who have been used to seeing low admission prices. Because of this, when in comparison with its friends, Six Flags skilled an additional 34% share level drop in attendance. Valuing the corporate turns into a considerably difficult process when it undergoes excessive adjustments that surpass its rivals in a big manner, no matter whether or not they’re optimistic or detrimental. As such, the market appears to low cost the corporate’s worth.
Nonetheless, I consider that the low cost is unjustified because the present technique is sound. Whereas clients skilled a sticker shock in 2022, this was a vital evil finished by the corporate to appropriate the failures of previous administration of their resolution to not increase costs. I consider that conducting the value improve in 2022, whereas most people experiences macroeconomic inflation and excessive gasoline costs, was very well timed because it permits the corporate to attribute/masks some portion of its larger costs to inflation (whereas nonetheless exceeding its charges), thus making clients extra amenable to its value hikes. In the identical vein, I consider that as inflation subsides, discretionary revenue rises and its theme parks refresh, Six Flags will see its attendance develop once more. This may, in flip, allow the corporate to develop its prime and backside line. Thus, Six Flags inventory ought to commerce at a better degree than it’s at at present.
Dangers
Six Flags has a excessive quantity of debt. A failure to refinance this debt, or the shortcoming to generate sufficient funds to repay this debt might trigger the corporate to file for chapter once more. Additional, the corporate may must refinance its debt at a lot larger rates of interest. This may increasingly result in larger curiosity bills and thus, decrease returns to shareholders.
Administration’s technique might fail. It’s doable that the misplaced attendance might be misplaced completely, at the same time as the corporate makes an attempt to invigorate and enhance its parks. If this occurs, Six Flags might not be capable to notice its worth.
Black swans. A myriad of black swans might happen that will trigger the corporate to fail. Some examples are: one other pandemic, curler coaster accidents, pure and environmental disasters inside the neighborhood of the parks inflicting injury to its infrastructure.
Closing
To summarize, I consider that the adjustments in income, capex and capital allocation methods are sound and can allow the corporate to extend its worth for the longer term. Firstly, by rising their entry costs and filtering our lower-spending company, Six Flags can higher serve their higher-spending company with shorter ready instances and a greater general buyer satisfaction. Secondly, by shifting capex spend to softer gadgets resembling higher park facilities and extra occasions, Six Flags can now regrow its natural attendance charges in a way more sustainable method. Lastly, by halting its money dividends and slowing share repurchases, and utilizing stated money to pay down debt, Six Flags strengthens its steadiness sheet.
With all this in progress, I consider that Six Flags is on its path to making a stronger, extra sustainable enterprise which can mirror in larger inventory costs sooner or later.
