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 couple of in Mexico. Previously few years, Six Flags has skilled a number of adjustments in administration and a major change in enterprise and capital allocation technique. The adjustments led to by present administration are considerably completely different from previous administration. Firstly, whereas previous administration had targeted on buyer quantity, present administration focuses on buyer worth. Secondly, the kind of capex spend has modified from greater capital-intensive initiatives resembling thrill rides, to decrease capital-intensive objects resembling seasonal occasions and park beautification. Thirdly, capital allocation has now shifted from a shareholder-friendly return by way of dividends and share repurchases, to debt-reduction and restrained share repurchases.

In analyzing the adjustments led to by the present administration, I consider that Six Flags is in an important place to enhance its enterprise and thereby improve its inventory worth sooner or later.

Transient 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 rotated at speeds unbecoming for a human physique. The identical feeling could possibly be felt when you owned SIX inventory lately. From 2017 to at the moment, the corporate has skilled a lot turbulence and disruptions, from repeated adjustments in administration, to a 180-degree change in technique and capital spending. Between 2017 to at the moment, there had been 3 CEOs:

1. Pre-Nov 2019: Jim Reid-Anderson (Aug 2010 – Feb 2016; Jul 2017 – Nov 2019)

2. Nov 2019 – Nov 2021: Michael Spanos, beforehand CEO of a PepsiCo division.

3. Nov 2021 – At present: Selim Bassoul

On this article, I’ll ceaselessly use phrases resembling “previous/earlier administration” and “new/present administration”, and the time interval “Earlier than” and “After”. References to “previous administration” and the “Earlier than” time interval refers back to the crew beneath Jim Reid-Anderson, whereas “new/present administration” and the “After” interval refers back to the present crew beneath Selim Bassoul. There shall be restricted point out on the administration crew beneath 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. Nonetheless, he deserves credit score for managing the enterprise by way of the only most catastrophic interval confronted by the corporate up 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 worth 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 is an alpha of over 400%. One may simply say that his tenure was very rewarding to shareholders.

Nevertheless, when Michael Spanos took over, the tone of the earnings name instantly modified. While Jim Reid-Anderson celebrated the success of his technique of promoting Annual Passes, Spanos sang a distinct tune. Natural attendance progress was a measly 0.2% (90% of the attendance progress of two% had come from newly acquired parks), adjusted FCF dropped 16%, Challenge 750 (a purpose of reaching $750M Modified EBITDA by 2020) was referred to as off for being unrealistic, dividends have been lower 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. Six Flags was firmly in disaster mode: no extra dividends, no extra share repurchases, and extra debt to strengthen their stability 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 crew. 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 companies trade whereas on the similar time, a non-executive chairman of Six Flags’ board. Nonetheless, inventory costs reacted positively, gaining 7.6% within the days following the announcement. Since then, he has made a collection of adjustments, together with slashing SG&A prices by 18% in his first full yr (FY22 vs FY19) and enacting a totally completely 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 staff allegedly (as a result of it could possibly’t be absolutely 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 one million views which berates the present administration crew in comparable nature. In brief, the frustrations centered upon:

1. Low morale & staff laid off – “He eradicated layers of crew members…and now has all of the Park Presidents reporting on to him”

2. Decreased visitors – “Our attendance has been abysmal and lots of of our visitors will not be returning”

3. Lack of high quality – “We’re charging our visitors extra and providing far much less”

That mentioned, 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 the moment and sooner or later.

Define of Technique Change:

Sort	Earlier than (2013 – 2019)	After (2020 – 2022)
Income technique	Recurring income Attendance progress	Increased spending per capita Increased-value prospects
Capex	Enlargement Extra theme parks Extra rides	Buyer-facing efficiencies Visitor facilities Extra occasions
Capital allocation	Dividends Share repurchase	Debt discount Share repurchase

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Income Technique

Earlier than:

The main focus of the prior technique was in promoting Annual Passes and limitless meal plans. The concept was to cram as many individuals as potential and generate incremental income from every new customer. Since there may be negligible marginal value on rides (maybe simply barely elevated utility prices and upkeep prices), having extra folks 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 varieties of spending one may incur in a theme park: parking charges, merchandise, and so forth.

And the technique labored. From 2013 by way of 2019, park revenues grew 32.3% on the again of attendance progress of 25.5%. Elevated attendance additionally helped the corporate develop its non-park revenues (sponsorships, worldwide agreements, lodging) by 64.5% by way of the identical interval, till it reached 6.5% of complete revenues in 2019. In any case, 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. Not would they should fear a few drop in income as a consequence of climate occasions since Annual Cross prospects who had already paid for his or her passes would not really feel cheated for choosing to return on a foul day. They may 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 cross holders usually lengthen their passes. It really appeared like a SaaS firm: recurring income, strong base of customers/prospects, negligible marginal value, with any and all incremental income dropping to the underside line.

After:

Nevertheless, it isn’t. As a lot as their income technique was SaaS-like, their enterprise was not. It is extra just like a gymnasium. When you can smush many individuals into the gymnasium, 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 bogs, much less resting areas and so forth. High quality is compromised because of amount. The identical was for meals. In selling their Annual Passes, previous administration had additionally promoted closely on their meal plans. This led to some prospects 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 prospects in favor of higher-spending prospects. 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 an important emphasis on rising spending per visitor even at the price of attendance. The outcomes are proven beneath. For the sake of normalization, I’ve taken out 2020 in its entirety as a consequence of Covid impacts.

Evaluate:

A drop in income as proven within the desk beneath 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 notice that whereas the comparisons above counsel 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 worth for Annual Passes (previous administration’s technique). Then in 2022, excessive fuel costs and rampant inflation impacted their efficiency. It was, by all accounts, a ‘transitionary’ interval between the previous 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%

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Supply: SEC 10k Filings. All values in ‘000s.

Digging just a little additional, traders ought to see a silver lining with Six Flags’ newest outcomes. As proven within the desk beneath, the present technique has succeeded in fueling a 50% improve in visitor spending amidst excessive inflationary atmosphere. With this in thoughts, traders must be happy, or no less than quickly appeased, by the results of the present technique to date. Alternatively, attendance has taken an enormous hit. To this finish, the subsequent part will discover how the corporate plans on gaining again attendance by way of 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%

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Capital Expenditures

Earlier than:

In listening to earnings calls by previous administration, the main target had been on buying new parks, worldwide licensing (which in the end 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.). By way of 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 in a position to match extra prospects 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 concentrated totally on park infrastructure and beautification”

“Elevated emphasis on bettering 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 wager that we may improve the park expertise by investing in our infrastructure… “

“we discovered that we had underinvested in our park on the subject of 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 loos”

“[Guest] facilities…we moved rapidly to improve our park infrastructure to answer our visitor suggestions, however we’re not stopping there. Visitor facilities are a prime precedence for our capex spend over the subsequent few years”

The desk beneath exhibits a few of the initiatives based mostly on the brand new administration’s technique:

Class	Examples
Efficiencies	Single-rider lanes (1Q22) Cellular cost know-how (Google Pay, and so forth.)
Visitor facilities	Extra clear bogs Extra benches and shaded areas (non-revenue producing) Extra cabanas (income producing) Digital boards displaying wait-times Park beautification Elevated park hours Higher meals
Seasonal occasions	Youngsters 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

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Supply: Firm 10k Filings, earnings calls, firm web site.

Evaluate:

The character of the calls and the give attention to capex have modified. From a method 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 necessary points: ‘gentle’ park enhancements and different much less capital-intensive expenditures. The capex focuses on rising park facilities and total enjoyment elements in order that prospects can discover higher worth in visiting Six Flags in hopes of accelerating natural attendance in future years. Up to now, 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 give attention to capex has not translated to administration’s desired attendance (20.4M vs goal of 25M to 27M yearly). Nevertheless, based mostly on the drastic improve in visitor spending as proven above, I’m optimistic that the spending will allow the corporate to satisfy its attendance targets as visitors 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. By way of 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 mixture of share buybacks and elevated dividends was music in its traders’ 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’d have realized a 100% acquire (~$14 in inventory appreciation and $17.34 in dividends).

Nevertheless, these returns to shareholders have include a price. Whereas administration can’t really 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 technique of returning mentioned $3.34 billion to shareholders, internet debt elevated by $870 million. Which means 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 mentioned 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
Web debt	2,100,705	2,061,904	1,943,682	1,512,336	1,402,732	1,303,551	1,229,470
Web 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

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Supply: SEC 10k Filings; Values are in ‘000s

These unhealthy choices on capital allocation have now change into a drag to their monetary efficiency at the moment. 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) greater 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 up 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 stability sheet by way of debt discount, while nonetheless returning worth by way of share buybacks. That is evident within the decline in debt and dividends, and a unbroken however subdued share repurchase over the previous yr. The tables beneath present a consolidated view of Six Flags’ 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

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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

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Supply: SEC 10k Filings. Values are in ‘000s.

From the tables above, you may see a number of important adjustments:

1. Dividends are successfully eradicated (2013-2019 avg: $222M/yr)

2. Debt is being paid down early (2022 vs 2021 complete debt: -$249M)

3. Repurchases are restrained (2013-2018 avg: $298M/yr)

The actions taken by present administration may 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 way of 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 stability sheet for the long run.

Evaluate:

Submit-2019, the corporate has spent ~$102M in share repurchases. Whereas I’m an enormous fan of firms utilizing share repurchases as a way to return worth to shareholders, at this second, I’m not a fan of Six Flags doing so. In mild of present rates of interest (and far to do with our conservative method), I a lot choose that firm focuses on paying down its debt and suspending their share buyback program altogether no less than quickly. Nonetheless, 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 the moment relative to 2019. A part of this has to do with the valuation bubble popping post-covid, and the opposite is because of the uncertainty within the success of present administration’s technique. Amidst the decline of revenues and in the end FCF, the decline in inventory worth has been a lot higher. This presents a possibility to buy SIX shares at a less expensive worth 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 (earnings)	4,126	2,542
Unlevered FCF	381,266	408,405

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Supply: SEC 10k Filings; All values in ‘000s.

	Mar 13, 2023	Dec 31, 2019
Inventory Value	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

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Supply: SEC 10k Filings; * denotes values in ‘000s.

Comps Valuation

In conducting a comparable valuation, I shall be utilizing two comparable firms: Cedar Honest (FUN) and SeaWorld Leisure (SEAS). Whereas these two firms serve barely completely different demographics (extra youngsters and family-friendly), they’ve an identical enterprise mannequin of working theme parks and are of comparable dimension. This makes them the very best comps to worth towards 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 (earnings)	4,126	3,608	-43
Add (Much less): One-time expense (earnings)	0	-155,250	0
Add: Loss on debt extinguishment (non-cash)	17,533	1,810	0
Unlevered FCF	381,266	353,962	459,446

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Supply: SEC Filings; Values are in ‘000s

FY 2022	SIX	FUN	SEAS
Inventory worth	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

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Supply: SEC Filings; * denotes values in ‘000s

Notice: Cedar Honest, SeaWorld and Six Flags report their numbers barely in another way, so I standardized their codecs to higher present a line-item comparability.

Six Flags’ 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 on Six Flags because of the U-turn in technique that the present administration is implementing, and the uncertainty that it holds. As proven beneath, Six Flags skilled drastic adjustments wildly exceeding its friends in each instructions. This makes valuing the corporate a way more tough 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%

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In evaluating park income per visitor in 2019 vs 2022, Six Flags’ income change is over 23 proportion factors greater than its friends. Out of a complete improve of over 50%, about 22% of this comes from simply the previous yr (2022). This drastic change led to sticker shock to Six Flags prospects, who have been used to seeing low admission prices. Consequently, when in comparison with its friends, Six Flags skilled an additional 34% proportion level drop in attendance. Valuing the corporate turns into a considerably difficult activity when it undergoes excessive adjustments that surpass its rivals in a major means, no matter whether or not they’re optimistic or unfavorable. As such, the market appears to low cost the corporate’s worth.

Nevertheless, I consider that the low cost is unjustified for the reason that present technique is sound. Whereas prospects skilled a sticker shock in 2022, this was a essential evil accomplished 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 fuel costs, was very well timed because it permits the corporate to attribute/masks some portion of its greater costs to inflation (whereas nonetheless exceeding its charges), thus making prospects extra amenable to its worth hikes. In the identical vein, I consider that as inflation subsides, discretionary earnings 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 the next degree than it’s at at the moment.

Dangers

1. Six Flags has a excessive quantity of debt. A failure to refinance this debt, or the lack to generate sufficient funds to repay this debt might trigger the corporate to file for chapter once more. Additional, the corporate may have to refinance its debt at a lot greater rates of interest. This will result in greater curiosity bills and thus, decrease returns to shareholders.

2. Administration’s technique might fail. It’s potential that the misplaced attendance shall 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 of understand its worth.

3. Black swans. A myriad of black swans might happen which 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 harm 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 visitors, Six Flags can higher serve their higher-spending visitors with shorter ready instances and a greater total buyer satisfaction. Secondly, by shifting capex spend to softer objects 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 mentioned money to pay down debt, Six Flags strengthens its stability 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 greater inventory costs sooner or later.