CAPScall of the Week: Six Flags
For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. districts and its congressional representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.
That's why this week and every week from here on out, I'll make it a tradition to examine one seldom-followed company within the Motley Fool CAPS database and make a CAPScall of outperform or underperform on that company.
What Six Flags does
If you have children, I'm absolutely certain you need no explanation of what Six Flags does. For those of you without children, Six Flags owns and operates 19 theme, water, and zoological parks throughout the United States, Canada, and Mexico. The company is fresh off of a bankruptcy reorganization that it entered into in June 2009 and exited in May 2010 after restructuring its debt at a considerably lower interest rate.
Whom it competes against
You would think that with the exorbitant prices being charged at theme parks, their operators would be cleaning up -- but that just hasn't been the case. The recession crushed many highly levered operators like Six Flags that didn't have an ample amount of cash set aside in case of a serious decline in discretionary spending. Cedar Fair (NYS: FUN) , which owns and operates 11 theme parks, seven water parks, and five hotels, is in a similar boat, as it's attempting to reduce its $1.74 billion in crushing debt.
But that doesn't mean everyone has suffered. Companies with more diverse business operations and a boatload of cash, like Comcast (NAS: CMCSA) with Universal Studios and Disney (NYS: DIS) with its five major Disneyland resorts around the world, have weathered the storm much better. Disney's third-quarter results last week highlighted a 21% rise in earnings, thanks in large part to improved attendance at its theme parks. For Comcast, its latest quarter noted 22% year-on-year growth at Universal Studios thanks to the resounding success of the movie The Lorax. Even SeaWorld, which Blackstone Group (NYS: BX) acquired in 2009, grew sales by an impressive 9.6% in 2011 and EBITDA by 18.3%.
After reviewing Six Flags' prospects and examining its latest quarterly report, I plan to make this the second consecutive week of an underperform CAPScall.
I stand by my original assessment two weeks ago that Six Flags doesn't have a sustainable business model. For one, it lacks the diversity that players like Disney, Comcast, and Blackstone can bring to the table. If one aspect of their business is struggling, each has other avenues of growth. That's not the case for Six Flags, which has no other business fallbacks. Secondly, the bulk of Six Flags' sales increase was due to ticket-price increases, which rose by 10% per capita. Attendance was up only a mere 1.5%, a discouraging figure considering the exceptionally warm weather.
Finally, the company has done little to shore itself up against future recessions. Although it restructured its $956 million in debt to a smaller interest rate, there's no sense in paying 37 times forward earnings for a company that could just as easily wind up in the same scenario in 10 years.
Because of the theme-park business' high need for capital investments to build new rides and entice customers to come to the parks, I just don't see Six Flags making any headway on its debt or growing earnings anywhere near a fast enough pace as to command a forward multiple of 37.
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At the time this article was published Fool contributorSean Williamshas no material interest in any companies mentioned in this article. He considers himself goofy by nature. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool owns shares of Disney.Motley Fool newsletter serviceshave recommended buying shares of Disney. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policythat's more powerful than a speeding locomotive.