Description

I'll make this one short. Six Flags is an operator of regional theme parks. For a more complete operational description, see doug126's excellent write-up and discussion. To summarize, the business is capital intensive and has what is called "strong operating leverage" in good times, and "high fixed costs" in bad. On the other hand, these characteristics make regional theme parks quasi-monoplies.

Six Flags has hit a bit of a speed bump this summer, reporting ~-10% EBITDBA growth. Management attributes the shortfall to mistakes at a few of their parks, and claims that they will be back on track next summer. The stock has gotten crushed.

Six Flags common may be an excellent investment, but at this point I think that their PEIRs securities offer a better short-term risk reward proposition. These busted convertibles are trading at about 14% yield, and are mandatorily redeemable for $25 in 2009, for a ~24% yield-to-maturity. I think they're a screaming buy.

1 -- Ratings: S&P rates PKS at BB- credit, but currently has them on negative watch. Let's say PKS gets dropped 2 notches, to B. 7 year spreads for B credits are about 900 bips. Even after throwing in a couple of hundred extra bips for juniority, it's hard to see why this preferred should be trading at more than 15-16% YTM.

2 -- Balance Sheet: Balance sheet coverage is OK. PKS has $4.4B in assets ($3.2B tangible) vs. $3B in liabilities. They're expecting $400MM in EBITDA this year. In liquidation, they would only need to get 5.75x EBITDA for their parks to repay their debt.

3 -- Cash flow: Cash flow coverage is a little light. Management is looking for $60MM in free cash flow this year, which provides a bit of cushion. If they can fix the problems at the three parks, FCF is likely to be more in the $100MM range.

4 -- Liquidity -- PKS has no significant debt maturing until 2007, so they've got plenty of time to straighten things out.

5 -- Comps: PKS is being priced on a par with such luminaries as American Tower and AES -- companies whose long-term survival is seriously in doubt. It's trading below OHI's preferred (subject of a great write-up by ran112), and the OHI preferred _is in arrears_.

6 -- Buyback: If the company actually does generate any cash, repurchasing these preferreds sounds like a darned good use for it.

Clearly there are risks here, but one is being handsomely compenstated to bear them. I spent a bit of time thinking about ways to hedge this, but decided it wasn't worth the risk of having the hedge blow up due to market irrationality, so I recommend just taking a straight long position as part of a diversified portfolio.

Catalyst

24% YTM; possible buyback.