Finding undervalued stocks during a market sell-off is one of the simplest ways to boost your retirement goals. A promising candidate right now is Six Flags Entertainment (SIX -2.26%), one of the largest park operators in the U.S. Here are three reasons investors can expect the stock to trade higher within the next five years.
No more freebies
Six Flags has a strong brand in recreational entertainment. It operates 27 regional parks and waterparks across the U.S., Mexico, and Canada. It has a long history of generating consistent annual revenues, excluding 2020 when the pandemic forced parks to temporarily shut down.
Data by YCharts
But previous management made the mistake of driving traffic growth through free tickets and heavy discounting, which kept Six Flags' profitability from reaching its full potential. While the company has generated a consistent high operating profit margin of around 26%, that is much lower than Walt Disney's parks, experiences, and products segment operating margin of 35%.
CEO Selim Bassoul took over in 2021 and implemented a new plan to raise ticket prices by eliminating freebies and discounted ticket sales, but he's going about it in a smart way.
As Six Flags raised prices, it also invested in new experiences beyond rides to give something back in return for asking customers to pay full price. It's in the process of installing new guest amenities and attractions, and improving the overall aesthetic of its theme parks to make them a more pleasant experience for guests.
As Bassoul said on the company's third-quarter earnings call last year, "These big bets can have big payoffs." While it's early in these initiatives, which was reflected in last quarter's 21% drop in revenue, management is encouraged that guest satisfaction and spending per capita are heading in the right direction.
The company reports fourth-quarter earnings on Thursday, March 2, where management is expecting to show improved operating profit.
Six Flags will have to execute a delicate balancing act of managing price and demand, but it does have key advantages working in its favor.
Six Flags has natural competitive advantages
The most important reason to bet on Six Flags' turnaround is the company's unique assets and the difficulty involved in new entrants building new theme parks.
Six Flags benefits from limited competition in the theme park business. Walt Disney is a supreme theme park operator, but you won't find a Disney theme park in Texas, Virginia, Missouri, Illinois, or many other states where Six Flags operates. There are several park operators around the U.S., but they are separated geographically from each other.
Here's why:
- Theme parks are expensive to build -- costing between $500 million to $700 million, based on Six Flags' estimates.
- There are zoning restrictions and limited real estate sites large enough to support the size of a theme park.
- Building a theme park includes long development lead-times.
These are natural competitive advantages protecting Six Flags' ability to generate consistent revenues and profits. This means if management successfully executes its ticket-pricing strategy and raises profit levels, the stock could rise substantially in value over the next several years.
A tailwind in travel and tourism
One final catalyst that could also help push the stock higher is the industry estimate for theme park revenues. The market is expected to reach $89 billion by 2025, up from $73 billion in 2019, according to Statista. A travel recovery coming out of the pandemic, along with higher ticket prices, gives Six Flags a nice combo to potentially grow revenue.
Moreover, Six Flags could benefit over the next decade from more people spending money on experiences, as opposed to physical goods, which has been a growing trend in recent years.
These trends may not be reflected in the stock's valuation. The stock currently trades at 1.6 times trailing revenue, which is a discount to the S&P 500 average. If Six Flags can grow revenue and push its operating margin higher, the stock would deserve a higher valuation. It traded at a price-to-sales multiple of around 4 before the pandemic.
As for risks, Six Flags has a debt-heavy balance sheet. But it has a trump card to handle its debt (if it ever becomes an issue) since it owns hundreds of acres of real estate. This gives the company a lot of options to raise extra cash from asset sales or other financial maneuvers.
All said, if you have at least five years to invest and are willing to accept some risk for a high reward, Six Flags is a promising value stock to bet on.
