Should You Get a Season Pass to Six Flags?

Theme parks seem like pretty bad investments on the surface. They cost a fortune to maintain and they are completely dependent upon economic fortune. A theme park has to consistently change its offerings before visitors get bored, and even then it's no guarantee that its multimillion-dollar investments will pay off. Of course, as with any logical thought pattern, this has all been proven wrong in certain circumstances. Six Flags Entertainment (NYSE: SIX  ) is one such example. Six Flags is outgrowing other areas of the leisure industry, all while the market neglects and, in management's opinion, undervalues the company. Let's take a look at the theme park operator's most recent earnings and see if there is more to the story than meets the eye.

Strong results
Six Flags delivered a record year in 2012. Attendance at the company's theme parks grew by 6% along with, according to management, all-time-high safety ratings and customer satisfaction rates. This helped drive top-line earnings to $1.1 billion for 2012. It wasn't just higher ticket sales, but season pass tickets that really brought the company over the top. Six Flags management has been putting more and more focus on increasing its season pass penetration rates, and it appears to be paying off. Season pass holders bring in more profit and cash flow than traditional single-day passes. In the most recent months, season pass sales at the theme parks have grown double digits over the prior year.

Adjusted EBITDA appears to be on track for the company's 2015 goal of $500 million. For 2012, the company brought in a record $383 million, buoyed by industry-leading EBITDA margins of 39%. Just a few years ago, in 2009, EBITDA margins were at 24.4%. Free cash flow soared high as well, by 23% to $233 million. Management seems very emphatic about achieving $6 in cash EPS by 2015, compared to $4.33 in 2012. That is nearly 9.3% annualized growth from now until then.

The market has been very receptive to Six Flags' run in 2012, again in contrast to prior years. The stock flew up 56% over the course of the year, including dividends.

For the most recent quarter, revenue ticked up 4.6% to $143.9 million, far above analyst estimates of $135 million.

So we know that Six Flags had a great 2012, but what should we expect going forward?

Macro trends
In a recent interview, the CEO of Comcast's (NASDAQ: CMCSA  ) NBCUniversal singled out the company's Universal Studios theme parks as a major growth driver going forward. The company has committed to spending an additional 25% on top of its already large budget for the theme parks. This is a mixed bag for Six Flags.

For one thing, it confirms that the theme park business is likely to remain strong throughout 2013. Both Six Flags and NBC Universal have made the case for theme parks as a relatively inexpensive leisure alternative compared to traditional vacations. As consumer sentiment continues to be cautious going into 2013, we will likely see people favor a trip to Universal, Disney, or their closest Six Flags instead of that trip to Paris.

On the other hand, it could spell greater competition for Six Flags. The company does not plan on making any major renovations to its existing theme parks, nor does it plan on opening any new parks. With Universal Studios now having access to Comcast's treasure pile, it could become a more attractive destination for theme-park-goers.

Looking forward, the company should remain strong. Management is continuing its rollout of more season pass offerings, such as one that includes a lunch and dinner dining pass. These are central to Six Flags' growth in the near future, and 2013 numbers already look encouraging, with deferred revenue on 2013  pass sales up 38% year over year.

Overall, it seems that Six Flags has a sound strategy for continued growth. At 10 times trailing earnings, the stock doesn't appear to be too expensive considering the expected growth in cash flow. Competitor Cedar Fair is more expensive on a trailing basis at 20 times earnings, but recently boosted its dividend by 50%. Six Flags remains one of hedge fund star Kyle Bass' top holdings as of the end of December 2012. Though not particularly cheap at this time, Six Flags can offer investors cash flow growth and a healthy 5.2% dividend yield.

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12/18/2014 4:02 PM
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