Warning! Please look at this five-year chart of the stock performance of regional theme park operator Six Flags
Today the company's press release touts that the fourth quarter's results were ahead of expectations. Revenues for the non-flagship fourth quarter (typically around only 10% of yearly revenue) increased 11% over last year's fourth quarter, although yearly revenues were down 2%. What you will not see is that quarterly net loss from continuing operations increased 2.6%, a figure that grows to 60% on a yearly basis. Bigger losses, even after a double-digit percentage gain in revenue, is white-knuckle scary (and read on to see why).
Ah, but the company is happy as a couple on a roller coaster about 2005's outlook. Attendance will increase 5% and per capita spending will increase 2.5%. Who believes that? Attendance has fallen for three straight years -- and the company's preseason forecast has a strong lean toward the rosy side.
So, let's count six red warning flags waving in the breeze at Six Flags.
Red Flag No. 1: High gas prices. Not only could they cut family travel, but also they could send the economy into a tailspin. Neither would be good for Six Flags.
Red Flag No. 2: Meteorological over-optimism. Six Flags is always optimistic before the weather changes and the peak season kicks in. Ah, the weather. You can always count on the company to highlight where the weather didn't cooperate in its end-of-season reports. Let's do it now. It is going to rain, somewhere, someplace, and that will keep a lid on attendance.
Red Flag No. 3: Debt. The long-term debt is $2.1 billion. Last year's revenue was $1.0 billion -- so debt is more than two times revenue.
Red Flag No. 4: Earnings. Analysts expect the company to report a $0.56-a-share loss in 2005. What did you expect? In 2004, the net interest expense was $191 million -- and that consumed a whopping 19% of revenue!
Red Flag No. 5: Free cash flow. Or lack thereof: The company expects none in 2005.
Red Flag No. 6: Operating margins. Competitor Cedar Fair
The outlook: The wild card in all this is capital spending. The company has lowered capital spending for four straight years after it peaked at $334 million in 2000. Isn't it common sense that a new and exciting ride will attract customers? Last year, the company found out that was true. Where there were new rides, attendance was strong. So capital spending has been increased. A new roller coaster in Mexico City is already swelling attendance there. Who would have guessed?
At 13 of the company's 18 domestic theme parks, there are new rides this season -- a true catalyst to spark real growth in attendance. The question, though, is: Can this debt-ridden company start to pay down its debt and become profitable? The company said in today's conference call that it expects to step down its capital expenditures starting in 2006. Granted, my perspective is that of an outside observer, but I have to wonder whether the company still doesn't get the message about how to build business and, ultimately, profits.
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