Description

Six Flags is an owner/operator of 37 regional amusement/theme parks in the U.S., Canada, Mexico, and Europe. Regional parks are accessible by car, as opposed to ‘destination’ theme parks (such as Disney World) where, to visit, the majority of visitors must fly. Six Flags theme parks serve 40 of the 50 largest metropolitan areas in the United States. Revenues come from the sale of tickets (54% in FY 2000), and the sale of food, merchandise, games and attractions inside the parks, as well as other income (46%). Also the company has exclusive rights, by long term agreements, to usage of the Warner Bros. and DC comics’ animated characters throughout Europe and most of the Americas. (Six Flags was once owned by Time Warner.)

Regional theme/amusement parks constitute natural monopolies since, once established, the cost and potential returns from a second, competing park do not justify the new investment. (The exceptions are near very large cities or ‘destinations’ such as Orlando or Las Vegas, where the number of visitors may warrant the placement of several amusement facilities.) Once established, regional parks enjoy pricing power, and organic revenues will tend to grow along with the surrounding area’s population and its level of disposable income. Maintenance capital expenditures will tend to grow at less than the rate of revenue growth. As a result, the levels of profitability and free cash flow will tend to steadily increase. In PKS’ case, free cash flow growth is expected to average 10%. This is realized through a combination of increased visitor revenues/same store sales growth of 5%, improved operating margins 2-3%, and slower capital expenditures growth—relative to revenue—of an additional 2%.

On Jan. 30th, 2002 PKS management announced consolidated revenues for FY 2001 of approximately $1.04-1.05B up 3.4%, and adjusted EBITDA of approximately $402.5-$407.5 mm. PKS guidance for FY’02 indicates an increase of 7-8% in adjusted EBITDA ($430-435 mm), and of approximately 6% in consolidated revenues ($1.064-1.065B).

Over the last 3 fiscal years (1999-2001) Six Flags (formerly Premier Parks, Inc.) spent $300+mm annually on capital expenditures. For the most part these reflect park acquisitions-and-upgrade costs. (Over the past 3 years PKS re-branded nine theme parks with the Six Flags name after adding new rides, and other attractions/theme presentations to provide a consistent ‘Six Flags Experience’.) In 2000 the first international Six Flags parks opened in Mexico and Holland. A park in Belgium was re-branded in 2001. For FY ’02 PKS predicts a significant decline in cap-ex spending to $140 mm which more accurately reflects a sustainable base for maintenance cap-ex. In combination with lower interest expenses of approximately $210 mm, free cash flow will turn sharply positive in 2002 and in the years ahead. ($80-100+ mm)

Six Flags’ long term debt at year-end 2001 is expected to come in at $2.1B, a decline from year-end 2000 ($2.32B/57% of capital). Indebtedness is expected to decline another $100 mm by the end of 2002. PKS has 92.4 million common shares—though I have read one report that cites an outstanding convertible issue that could bring the number of fully diluted shares to 106 mm. (I will use the higher, more conservative figure in calculating TEV/EBITDA.)

Based on EBITDA growth of 10-12% annually, and an average TEV/EBITDA multiple of 9.5 (7-12 has been the historic range), PKS shares have the potential for an IRR of better than 25% over the next five years. (Current price: $13.95) Based on PKS Jan 30th reiteration of $430 mm in EBITDA for 2002. $430 x ((1+.10)^5))=$692.5 mm EBITDA FY’06x 9.5=$6.578B less $2B in total debt=$4.578B/106 mm shares = target price of $43.20. This calculation does not reflect any potential excess debt reduction subsequent to 2002.

Catalyst

PKS’ management has shown the ability to increase operating cash flow from its acquisitions, control costs, and grow revenues by offering guests an enjoyable experience at relatively low prices. In 2002, improving financials combined with PKS regional, competitive position should combine with positive, emerging macro-economic catalysts to lift the share price. These larger catalysts include an improving, if not yet robust economy, and ongoing (secular) consumer concerns about flying. Shareholder equity seems now poised for an extended period of growth.