Most roller coasters begin with a steep ascent, followed by a sharp drop. For shareholders of theme-park operator Six Flags Entertainment, it's been mostly an upward climb: The stock has rocketed roughly sixfold (minus some short-term blips) since the company re-listed on the NYSE after emerging from backruptcy protection in 2010.
It's hardly cheap at this point. The $5.3 billion company is valued at 28.4 times its blended forward earnings, well above the global industry average multiple of 20.4 that includes rivals like U.K.'s Merlin Entertainent (18.7) and Seaworld Entertainment (19.2), according to data compiled by Bloomberg. But there are reasons why investors hold it so dear, and analysts project further gains.
Six Flags has done a good job of learning from its mistakes. It watched ticket sales decline during the financial crisis as it sunk under a mountain of debt; this time around, it's been pushing programs like season and dining passes as well as memberships to encourage consistent and recurring attendance. It seems to be working, with overall attendance 24 percent higher in the quarter ended March 31, compared with the same period a year earlier. That's the same year-over-year increase achieved by its "Active Pass Base," which include members and season passholders.
Six Flags' success -- which includes more than doubling its earnings before interest, taxes, depreciation and amortization since its days of bankruptcy protection -- also can be attributed to its efforts to avoid staleness. On an earnings call in April, CEO John Duffey said that 2016 will mark its sixth consecutive year with a new attraction at each of its parks, a strategy it intends to maintain. The Grand Prairie, Texas-based company also has other levers for growth, such as expanding its roster of themed events like Halloween's Fright Fest and Christmas-inspired Holiday in the Park, as well as licensing its brand to develop parks outside North America.
Six Flags is also rolling out a new "virtual reality roller coaster,'' which uses Samsung virtual reality headsets to let riders sync computer-generated special effects with the action of the coaster. Duffey says the experience -- which had only been launched in three parks as of March 31, with six more slated before June 30 -- could be a "game changer" for the company.
Because of all this, investors can actually take comfort from Six Flags' decision this month to issue $300 million in new debt, half of which will be used to repay existing loans, with the remainder earmarked for share buybacks and strategic initiatives. Adding debt underscores Six Flags' confidence in its future performance (the company is all too aware it must be prudent with borrowings). It also signals that the underlying business is strong enough to combat any negative seasonal headwinds, such as reduced attendance at its parks during rainy weekends, according to FBR & Co. analyst Barton Crockett.
A smooth ride can never be guaranteed, but if everything pans out, Six Flags shareholders will be getting paid a roughly 4 percent dividend while avoiding the abrupt drops and dips that draw crowds to the company's attractions. That could make the stock worth its steep price of admission.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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