The Six Flags No One Sees

I did it. I finally became a Six Flags (NYSE: SIX  ) investor earlier this month. It was really just a matter of time. I'm passionate about amusement parks. I also happen to own small chunks of Cedar Fair (NYSE: FUN  ) and Disney (NYSE: DIS  ) .

What attracted me to a stock that's trading for less than a fast-food value meal? It's not the silly notion that the company is going to post blowout results for its telltale third quarter in a few weeks. I've already conceded that the industry went through a disappointing summer season.

It's not even the potential for the market getting excited about the industry in the near term. That's not going to happen. You may have heard about what happened in Ohio on Friday. Cedar Fair decided to dismantle the rides at its Geauga Lake amusement park in the outskirts of Cleveland. The park will exist exclusively as a waterpark come next year.

What you probably don't know about is what happened in Winter Haven, Fla., earlier this week. Cypress Gardens is the oldest theme park in a state that has come to define the genre. It temporarily closed in 2003 but reopened as a refashioned traditional amusement park two years later.

The success at Cypress Gardens took everyone by surprise, drawing 1.1 million guests last year alone. That was far more than the original park had attracted in ages. Unfortunately, it wasn't enough. The operator filed for bankruptcy a few weeks ago. The winning bidder on Tuesday offered a measly $16.8 million to take over the debt-saddled attraction. It wasn't necessarily the highest bidder; it was the only bidder.

So if Cedar Fair is scaling back, Six Flags even sold a few of its lesser parks earlier this year. And if an iconic attraction trades hands for a pittance, why did I buy Six Flags?

Step through the turnstiles. Let me show you my world.

Quality at a discount
Forbes put out its annual list of the most valuable NFL franchises last week. The Dallas Cowboys narrowly edged out the Washington Redskins for the top spot, but the Redskins are still the envy of the league. The $312 million in revenues last year is 22% higher than the nearest team (the Patriots). The $66 million in operating profit is 43% higher than the nearest team (the Raiders).

I'm mentioning this only because it's Redskins owner Dan Snyder who orchestrated the management shakeup at Six Flags less than two years ago, putting his stamp on the struggling regional amusement park operator and personally inserting former ESPN programming guru Mark Shapiro as CEO.

Redskins fans may complain about high parking prices, ticket rates, and the product on the field -- in much the same way that Six Flags patrons have long before the new regime took over -- but it has never gotten in the way of running a great leisure-based business.

Six Flags may not have Clinton Portis in the backfield, but it does have a purpose to cling on. See, Shapiro spent enough years working at ESPN to know how its parent Disney succeeds at the theme park level. Create a quality environment where young families can have a special day out, and you'd be surprised at how wide the billfold can open when it comes time to buy on-ride snapshots, souvenir T-shirts, and even stay long enough to spring for dinner because no one wants to leave.

To that end, Six Flags has succeeded during Shapiro's second season. Guest approval ratings and guest spending are sky-high. Attendance has been a challenge, just as it has been at Cedar Fair this season, but the typical guest walking through the turnstile seems to be spending more.

It won't be obvious when the company reports its third-quarter results in a few weeks. Shapiro's makeover isn't complete. Last year he didn't have time to break in all of his family-friendly initiatives. Corners were cut toward the end of last season, but the company is holding true this time around. It shows in the favorable exit surveys, with the company claiming that August satisfaction is well ahead of the same month last year. Investors will have to hibernate, though, waiting for the positive guest experiences to translate into quicker, giddier turnstile clicks from the get-go come 2008.

If this doesn't sound like much of a buying thesis, it's because I haven't discussed the stock itself. Two months after Snyder and Shapiro won control of the company, elated shareholders bid up the shares to as high as $11.93. The stock is trading at less than a third of that price today.

It's important to note that the market doesn't believe that Six Flags is a third of the company they thought it was in February 2006. Its balance sheet is packed with just more than $2.2 billion in debt. So a move from $11.93 to yesterday's close of $3.42 may represent a market cap move from $1.1 billion to $0.3 billion, but the more telling enterprise value actually went from $3.3 billion to $2.5 billion.

Leveraging isn't an admirable trait when times are lean. However, if the market decides to value the company at twice the enterprise value it feels that Six Flags is currently worth, then the stock would be in the high-$20s.

I'm not delusional. I don't think I'm sitting on a solid 2008 operating season from an eight-bagger. I'm just pointing out the difference between the floor and the potential ceiling.

It's hard to make out that ceiling now. The industry appears to be in a holding pattern. The sale of Cypress Gardens this week frames it perfectly. Cedar Fair and Six Flags could have finally achieved a presence in Florida on the cheap, joining the likes of Disney, General Electric (NYSE: GE  ) , and Anheuser-Busch (NYSE: BUD  ) . A deal in Florida could have been ambassadorial to the foreign travelers, as well as the locals who would snap up seasonal passes and then explore other properties in the chain.

They passed. Cedar Fair is still working last year's Paramount Parks purchase from CBS (NYSE: CBS  ) through its tricky digestive tract. And Six Flags is working hard to change perceptions at the parks it already owns.

So I realize I'm arriving early at the Six Flags gate. It won't be another 13 months before I hear what I think I'll hear -- that healthy off-season annual passes sales and robust crowds of free-spending guests proved to make up the tonic that Wall Street was craving before it got in line behind me.

As long as the creditors are as patient as I am, I think we'll be just fine.   


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