When it comes to companies that specialize in owning and operating theme parks, there are few companies to choose from. One such company worth checking out is Six Flags Entertainment (NYSE: SIX). First, the company showed an impressive recovery from the depths of the COVID-19 pandemic. More recently, however, the financial performance achieved by the company has been disappointing. Declining visitor numbers more than offset higher spending at the company’s theme parks, causing sales and profitability numbers to decline significantly. In absolute terms, the company’s stock is still trading at a rather low level. But compared to similar companies, the stock seems a bit high. In the near term, investors could experience additional pain if current trends continue. For this reason, I think a “hold” rating on the stock is more appropriate at this time.
A mood swing
In mid-June of this year, I wrote an article that took a pretty optimistic stance on Six Flags Entertainment. At the time, the company was enjoying a rather remarkable recovery from the worst days of the COVID-19 pandemic. Attendance grew year on year, and an increase in spending helped propel sales and profitability numbers higher than at the same time in fiscal 2021. I felt the company’s stock was up on both an absolute and in looked pretty cheap compared to similar companies. And as a result, I felt comfortable enough to give it a “buy” rating, reflecting my belief at the time that the shares should outperform the broader market for the foreseeable future. Unfortunately, things didn’t quite go as planned. Since this article was published, the S&P 500 is up 2.8%. In comparison, Six Flags Entertainment has generated a 14.5% loss for investors.
When you’re bullish on a particular company, it can be difficult to admit that moving in the opposite direction of what you want isn’t warranted. In this particular case, I believe the move lower was warranted. To understand what I mean, all we have to do is look at financial results covering the company’s second and third quarters of fiscal 2022. These are the only two quarters for which new data is available, which was not available when I last wrote about the business. In the third quarter of the year, the company’s revenue was just $504.8 million. This represents a significant decrease from the $638.3 million generated at the same time last year. That decline came even as average per capita spending at parks rose from $52.02 in the third quarter of 2021 to $60.96 at the same time this year.
The decline was then due to a fall in visitor numbers to the theme parks from 12.03 million to 8.03 million. Management attributed this drop in visitors to two key factors. The increase in ticket prices imposed by the company proved to be particularly problematic. And second, the company suffered from the elimination of free tickets and heavily discounted product offerings that had been used to attract more guests to the parks during the worst days of the pandemic and the early days of the recovery. This is really interesting and contrasts with what some other theme park operators have experienced. Although not a perfect comparison, The Walt Disney Company (DIS) continues to raise prices at its theme parks, and miraculously, attendance continues to be robust. This shows that Six Flags Entertainment does not have the same branding and pricing power as Disney.
This drop in sales also brought a drop in profitability. Net income fell to $115.8 million at the same time this year from $157.2 million in the third quarter of 2021. Operating cash flow decreased to $130.6 million from $176.6 million. Adjusting for changes in working capital would have gone from $216.1 million to $180.1 million. Meanwhile, the company’s EBITDA also suffered, plummeting from $278.8 million to $226.1 million. All of that makes sense. A drop in sales alone can be problematic. In addition, due to the company’s high fixed costs, profits are likely to fall more sharply than sales in most cases.
As you can see in the chart above, this weak third quarter was a major contributor to pushing earnings for the first three quarters of fiscal 2022 overall so far. Revenue of $1.08 billion is down from the $1.18 billion reported at the same time last year. Once again, theme park prices have risen while visitor numbers have fallen from 21.92 million to 16.37 million. This drop in sales has also brought with it a drop in profitability. Net income fell to $95.6 million from $131.9 million. Operating cash flow decreased to $193.8 million from $305.9 million. On an adjusted basis, the decline was more modest as the metric fell to $262.8 million from $282.3 million. And just like last quarter alone, EBITDA also declined, from $403.5 million to $365.9 million.
To be honest we don’t really know what to expect for 2022 in its entirety. But if we annualized the results to date, we would have net income of $94.2 million, adjusted cash flow from operations of $296.5 million, and EBITDA of $470.1 million. This would mean the company is trading at a forward price to earnings multiple of 19.6, a forward price to adjusted operating cash flow multiple of 6.2, and a forward EV to EBITDA multiple of 10. For comparison, if we were to use the data from fiscal 2021, these results would be lower at 14.2, 5.7, and 9.1, respectively. As part of my analysis, I also compared the company to two similar pure-play theme park operators. As you can see in the table below, Six Flags Entertainment is more expensive than both companies in terms of price-to-earnings and EV-to-EBITDA. And when it comes to the price-to-operations cash flow approach, it falls between the two.
|company||price / result||Price / Operating Cash Flow||EV / EBITDA|
|Six Flags Entertainment||19.6||6.2||10.0|
|Cedar Fair (FUN)||8.7||6.1||6.4|
|SeaWorld Entertainment (SEAS)||12.0||7.0||8.5|
Based on all the data provided, I believe Six Flags Entertainment will be okay at some point. However, the company’s recent financial performance has been problematic. While not emphasized by management, I think some of the weakness has to do with broader economic concerns as well. But either way, it shows weak pricing power for the company at a time when industry leader Disney looks far stronger. Compared to the more comparable amusement park operators, Six Flags Entertainment also trades somewhat more expensively. Based on these factors, I believe it is a wise decision to downgrade my rating on the company to a hold from the buy I previously had.