Six Flags Entertainment Corporation

Moat: 1.5/5

Understandability: 2/5

Balance Sheet Health: 2/5

Six Flags Entertainment Corporation is a regional theme park operator that derives value from experiences and its operations are highly dependent on local economies and seasonality.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Six Flags Entertainment Corporation, often referred to by its ticker symbol FUN, is a regional theme park operator in North America. The company operates a portfolio of amusement parks that vary in size, theme, and attractions, offering rides, water parks, shows, games, and other entertainment options.

Business Overview:

  • Revenue Streams: Six Flags primarily generates revenue from park admissions, in-park spending (food, merchandise, and games), and sponsorships. They operate in local markets and experiences are very regionalized based on culture and taste.
  • Industry Trends:
    • The theme park industry is subject to seasonal fluctuations, depending on weather and school holidays. Demand tends to be stronger in summer and around holidays.
    • Changing consumer preferences, such as a greater preference for unique and immersive experiences, drive demand and investments in new features and attractions.
    • The industry is also impacted by discretionary spending and economic conditions as people tend to spend on entertainment more if they are doing well economically.
    • Mergers and acquisitions are a part of the growth strategy of theme park companies.
    • Competition in the industry has been getting more competitive, with increasing intensity across players, price sensitivity and customer expectations.
  • Margins: The company’s margins are variable and depend on operating expenses, which are related to maintaining the physical infrastructure of the parks, staffing, and costs of materials. The operating margin of Six Flags has been fluctuating and has been below its competitors recently.
  • Competitive Landscape: Six Flags competes primarily with regional theme park operators, local amusement and water parks, and entertainment options in general. Major competitors include Cedar Fair, which recently completed a merger with Six Flags. While Disney is also a part of the theme park industry, their parks and offerings are quite different, therefore the competition with Disney is limited.
  • What Makes the Company Different: Six Flags is a regional operator that focuses on providing traditional theme park experiences at affordable prices. Many of their parks are concentrated in areas of higher population density, which gives them a loyal local base and can help in getting sponsorships. The company also recently launched a new membership program which may attract new customers.

Financial Analysis:

  • Revenue Distribution: Six Flags generates revenue from admissions, in-park spending, and sponsorships. The majority of the revenue comes from admissions, with in-park revenue and sponsorships playing important roles.
  • Historical Financial Performance: The company’s financial performance has been variable, mainly due to the effects of the pandemic and resulting closures and a recent merger. Prior to the COVID-19 pandemic the company was experiencing growth, this was then followed by multiple years of decline, and now it seems to have stabilized with a positive growth rate.
  • Current Financial Health (Latest Earnings Call):
    • Six Flags is focused on growth and expansion, and the company is making strategic investments in its business, including its digital offerings, new pricing strategies, and the introduction of new products and attractions.
    • They have been focused on cutting costs and leveraging the infrastructure of acquired companies.
    • Management believes they are well-positioned to generate growth and deliver value to shareholders in the coming years.
    • The 10Q report for the quarter ending September 30, 2024 indicates a net loss of 442 million which is better than 1.345 billion net loss for same quarter last year. Adjusted EBITDA is 443.5 million, which is better than previous years. The YoY revenue has increased by 23%, and the average spend per visitor has also increased. This indicates a successful turn around from previous years.
    • The number of shares outstanding has gone up from 81 million on September 30, 2023 to 147 million at September 30, 2024. The net loss per diluted share is 1.35 dollars.
  • Earnings Call Notes:
    • Management discussed the success of a new premium pass system which has attracted many customers.
    • The company has been able to reduce labor costs through better management and technology implementations.
    • They are very focused on maintaining and improving cash flows.
    • They also mentioned that they are focusing on cost management and integration of the acquired assets.
    • They have been exploring opportunities in new markets and other areas to expand the reach of their brand and park operations.
    • There has been an emphasis on digital expansion with a focus on improving their app, the online ticket purchasing process, and integrating digital marketing channels.
  • Recent News/Concerns/Controversies:
    • The most important news for the company is the merger with Cedar Fair which is expected to close in the first half of 2024. The merger will combine the second- and third-largest amusement park operators in North America creating a behemoth in the theme park industry. This has caused a lot of volatility in the share price and questions on whether these companies can integrate effectively.
    • There are some concerns about the dilution of shares as the company has increased its outstanding shares substantially to fund the merger.
    • As of the last 10Q reporting period, the company is operating at a net loss of 442 million for the last 3 months and has negative owners equity which is a red flag. They are still focused on turning things around.
    • Some sources mention that management may not be fully transparent about future plans.

Moat Analysis:

  • Moat Rating: 1.5/5. Six Flags possesses a narrow moat because of the regional nature of their business, brand recognition, and established infrastructure.
  • Moat Justification: The company’s main moats stem from:
    • Brand recognition: Six Flags has strong brand recognition, which is a big plus in the regional markets it operates in.
    • Location and infrastructure: It is very difficult for competitors to build competing amusement parks near their existing locations. This allows Six Flags to command certain geographic advantages. Moreover, building and maintaining huge parks is difficult and requires a lot of capital, which is a deterrent for small players.
    • Acquired infrastructure: Due to its aggressive acquisition strategies the company has a good geographical footprint along with an ability to implement new products and strategies across their chain which is better than their competitors.

Risks to the Moat and Business Resilience:

  • Intense competition: The increasing competition from theme park operators both large and small can reduce their market share and profit margins. The recent merger with Cedar Fair also increases competition for the company’s competitors.
  • Seasonality and external factors: As the company’s operations are seasonal and driven by demand based on weather and school holidays, any disruption to this can hurt the business. Furthermore, factors such as economic conditions and fuel prices can impact results.
  • Reliance on Management: The future of the company may depend on the new management that would be formed after the completion of the merger with Cedar Fair. Any missteps from their side can seriously impact the operations of the business.
  • High capital costs: To maintain their parks and invest in new technologies the company will have to spend significant capital, increasing expenses and decreasing profitability.
  • Debt Burden: The company carries a massive debt burden that may be hard to offset with current cash flows. Any changes in interest rates may further affect their debt servicing capabilities.
  • Integration Risks: There are several risks involved with the ongoing merger with Cedar Fair. If the two companies are unable to find synergies or the integration doesn’t go smoothly, the company will not benefit as much as it wants from this merger.

Understandability: 2/5. Although the concept of theme park businesses is easily understood, calculating the value of Six Flags is not simple because the company is very asset-heavy and has a unique position in the sector. It needs several calculations to determine if the company is undervalued or overvalued. The complicated finances and various moving parts makes valuation harder to understand.

  • Business complexity: The operating model of Six Flags is relatively simple to grasp. The main challenges occur with analyzing and projecting the company’s financial performance and profitability. Understanding and applying the concepts of working capital, capitalization, non-recurring expenses and so on may be hard for a beginner.
  • Financial complexity: The company’s financial situation is very complex and a deep understanding is needed to value it properly.
  • Industry understanding: The understanding of how the various segments in the theme park industry work will be beneficial.

Balance Sheet Health: 2/5. The company has struggled a lot to retain its profitability and balance sheets have suffered the most. While the company has made some improvements to its operations, it still faces challenges to pay its debt, therefore it gets a below average rating.

  • Debt-to-Equity Ratio: It is very high, showing the company’s reliance on debt financing.
  • Cash Flow: As mentioned, the company has struggled to maintain consistent cash flows, this may affect their ability to pay down debt in a timely manner.
  • Net Asset Value: The company has a negative net asset value, indicating that their liabilities outweigh their assets.
  • Earnings and ROIC: The company’s earnings are not as high as their peers, with a comparatively lower ROIC.