Six Flags (SIX) reported earnings on February 24^th. The company outperformed expectations. The loss of a dollar a share was roughly in line with estimates, while Its revenue loss was significantly less than expected by consensus. Other positive undercurrents in this earnings report suggest that the nadir of the crisis for theme parks, in North America at least, has passed. That’s good news for Six Flags since its’ facilities blanket the continent. The company recently announced it plans to open all 26 locations in the coming season. Consumers flush with stimulus coming out of a depressing and trying period marked by detachment from the experiential economy seem poised to answer the company’s invitation. 

Source: Six Flags Investor Relations

Despite the obvious financial hardship with missing a season due to a global pandemic, many metrics appear to indicate that when consumers do come back at the levels, or in excess of them, that were common prior to the pandemic they will be spending more. This is not an incredibly difficult business to understand; a lot of customers will be coming to the company’s parks as long as progress on the virus isn’t significantly reversed and by the looks of it they will be spending more than they have in the past when they do. This appears to be at least partially a result of adept management and product refinements like significantly upgrading dining options and also facilitating contactless payment. Pent-up demand meeting a streamlined operation is the primary thrust of why we like the stock, but there’s also a great management team leading the firm and a convergence of once-in-a-lifetime factors that make us believe this coming season will be one to remember from an earnings perspective.

Source: Company Reports, Q4

Strong Consumer Plus Improving Healthcare Situation Equals Happy Shareholders

The strength of the US consumer going into what is looking like will soon be a post-pandemic economy is sure to raise many boats. Still, we think industries like theme parks and other luxuries necessarily foregone during the past year’s trials will especially benefit, as will risk-adjusted returns. After all, we think as a general principle, a lot more people would be amenable to funnel cake and roller coasters than, say, staying at home and watching Netflix on your Peloton. Get the point? We are on the verge of a sea-change in consumer psychology; the over-spending on goods that marked the pandemic will likely reverse in favor of services, particularly those of an experiential nature. Indeed, there is pent-up demand for gathering, interaction and fun as there should be, and we think that this demand paired with a robust US consumer balance sheet means upside surprise in the company’s most significant KPIs is far more likely than not.

Source: SeekingAlpha

Humanity has been through one of the most traumatic and unsettling episodes of the modern age. The product Six Flags is offering is in this light more appealing than it was prior to this catastrophe. Even more so when you consider the extensive, consumer-informed, improvements they have made to their product. This paired with the largest footprint in the industry makes us think SIX is a pretty safe re-opening play and that it’s more likely the stock is headed toward 10-year highs instead of toward the prices marked in the crescendo of simultaneous global lockdowns. While some operators like DIS and Universal have a high-volume singular model with limited geographic reach, even in the event of some setbacks with the healthcare situation SIX is better positioned to collect revenue from parks in areas where outbreaks aren’t prevalent. This is simply not an option for many operators if a region like Southern California becomes subject to an outbreak.

We think that macro-level spending on the products of ‘Epicenter’ stocks will be significantly higher than in regular times. Perhaps no product better exemplifies this desire, which we think will surprise the upside. Millions of parents are likely eager to take their long-isolated children out for a day or weekend of outdoor fun. The safety of the experience being offered by Six Flags also seems to us to exceed many of their competitors, and the sheer number of their parks gives them a competitive advantage over peers.

SIX operates more parks than any company in the world and thus benefits from geographic diversity that other significant operators do not. We monitor healthcare data and the pace of vaccinations exceptionally closely, and developments are overwhelmingly positive. Some investors may question whether or not the stock has run up too far already and whether it’s time to take gains. We want you to remember that the run-up in the stock price has happened in anticipation of this moment. Six Flags is on the verge of re-opening nearly all of its properties. The company’s management is convinced that pent-up demand paired with their impressive belt-tightening and modernization during the downtime should result in some highly profitable quarters on the horizon, as are we.

Have a Touching and Touchless Outdoor Day With Family and Friends

When you think of the indirect competition of their parks like movie theaters, restaurants, vacation-travel, and even home-entertainment and then take into account the touchless experience introduced by management as well as the outdoor nature of their theme parks, you can see why millions of Americans may be attracted to this activity as one of their first re-engagements with the experiential economy. When you consider the location of Six Flags park and the populations that live within 100 miles, it is easy to see why the risk for attendance seems to be to the upside.

Our Head of Research, Tom Lee, coined the term ‘Epicenter’ stocks in the heat of the crisis. The term refers to companies that have been closest to the economic and social consequences of the COVID-19 Global Pandemic. Our ‘Epicenter’ stock picks have generally focused on the strongest and best-managed players within the most adversely affected industries. Six Flags (SIX) is a perfect example of a stock meeting these criteria. Theme parks, by some measures, were the most adversely impacted industry since operators are heavily dependent on the peak-season for the vast majority of revenue. In the case of Six Flags, during normal operating years, 75% of revenue is earned between Memorial Day and Labor Day. Similarly, labor expenses are concentrated during these periods.

Thus, missing a season can put a poorly managed or overly leveraged operator out of business quite quickly. Six Flags should know, in 2009, market conditions much less devastating to the bottom line drove the company into bankruptcy. The company has weathered the worst crisis in the industry’s history and used the interruption as a springboard to accelerate already-needed changes to boost brand-value, attendance and slash operating expenditures.

Many ‘Epicenter’ industries that may have been behind the curve technologically have used the do-or-die nature of the situation to radically streamline their businesses in ways that naturally align with shareholders’ incentives. Six Flags will be implementing a new CRM system that should boost sales and season passes. The company is also experimenting with using its enhanced surveillance and technological monitoring of the park to experiment with dynamic staffing. Their staff levels will now respond in real-time to guest traffic. Simple improvements like this in the single-segment business make a big difference, particularly if they converge with the flush balance sheet of stimulus-rich consumers who have cabin-fever.

Total attendance declined 79% in 2020, and the company’s cash position and debt schedule are all well-in-hand. The fact that the company is in as strong a position as it on the verge of the 2021 peak season is a testament to the competence of the management team led by Mike Spanos. In the second quarter of 2020 demand was at 25% of previous levels, in Q3 it was at 35% of previous levels. In the most recent quarter capacity of operating parks got  up to 51% from previous levels. Do you see a pattern? So do we, and we think it’s just getting started. In addition to the aforementioned bullish harbingers hedge funds appear to be increasing exposure to SIX as well.

Source: Tipranks.com

Risks and Where We Could Be Wrong

The key risk here is obviously any reversal in the vaccination timeline or any setbacks with regards to new variants of COVID-19. The financial condition of the company is pretty strong considering. Consumers seem poised to actively re-enter the market for the newly enhanced and improved Six Flags product. However, the future earnings of this company are about as closely correlated to the path of the virus as can be. Setbacks with regards to the healthcare situation will likely adversely effect price whereas better than expected outcomes will be supportive of continued appreciation.