Six Flags: Tailwinds Will Keep These Shares Flying High

| About: Six Flags (SIX)

Summary

Six Flags has recovered nicely since emerging from bankruptcy and has continuously updated its in-park attractions to grow its visitor numbers.

Six Flags has leveraged its brand to form international partnerships that should generated significant high-margin licensing revenues in the coming years.

Investors are looking at a potential return of 25% by buying the stock.

Analysis

New Attractions Keep Six Flags Relevant. In a bow to the growing popularity of virtual reality, Six Flags (NYSE:SIX) recently introduced new Horror-themed attractions that enable riders wearing virtual reality headsets to have a fully-immersive experience. These new attractions complement Six Flags' existing New Revolution VR and Superman VR coasters.

The move is the latest by Six Flags' management team led by CEO John Duffey, which recently marked its sixth year at the helm of Six Flags, and is meant to serve as a fresh attraction for visitors of its various amusement parks around the United States.

Recently, Six Flags reported that attendance grew by 7% in the first half of 2016, with its guests spending 3% more than a year ago despite a sluggish economy and the company is on pace to record revenues of $1.3 Billion this year. What's more, Six Flags has posted cumulative earnings of $1.79 in the trailing twelve months compared to Wall Street's estimate of $1.67 per share. Clearly, the company has come a long way since emerging from bankruptcy in mid-2010.

Speaking of attractions - one attractive aspect of Six Flags stock is its high dividend yield. At 4.32%, Six Flags' dividend yield is more than double the dividend yield of the S&P500 and provides $432 in annual passive income to investors who've purchased $10,000 worth of the stock.

Six Flags' shares are down by 2.2% in the year-to-date, mainly because the stock sold-off after the company's second quarter earnings came up slightly short of Wall Street's expectations for the period. Consequently, investors don't have to deal with the undertow of a hefty run-up when considering whether to buy the stock - but the question is whether they should in the first place. Let's take a look:

Dividend and Outlook. The big number for Six Flags is 600 - that is, the company has Project 600 - an aspirational plan to achieve $600 million of modified EBITDA by 2016. Duffey reiterated the company's commitment to this target in Six Flags' last earnings call and the company appears on its way to this target with $541 million of adjusted EBITDA in the last twelve months. Another thing investors should note is that Six Flags' Active Pass season pass holders grew by 11% in the first half. This is significant because Active Pass members come to parks all year-round, helping to generate more annual revenue and cash flow than single-day visitors - while also helping to smooth out the seasonality of Six Flags' earnings.

Six Flags is also gaining traction overseas, with the company seeing its international licensing revenues double in the first half while making plans with its overseas partners to open six parks in Dubai, China and Vietnam. These endeavors are critical for Six Flags since it broadens its brands awareness - its upcoming park in Bishan, China will be one of the biggest parks in the world.

More importantly, the licensing revenues it generates from its international partnerships have high margins and require no capital investment from Six Flags - and helps Six Flags maintain its industry-leading EBITDA margin of close to 40% -- which also happens to be five-times the EBITDA margin for the average S&P500 company. Looking ahead, the six parks that Six Flags anticipates to open overseas should generate between $60 to $120 million of additional EBITDA for the company - or between 11% to 22% of its current EBITDA levels.

Going forward, we expect that Six Flags will be able to continue growing its top line in the mid-to-high single digits. While we're confident that its high margin International Licensing revenues will continue to grow strongly, these won't be driving the company forward immediately in the manner that its food-related revenues, which grew by 9% in the first half - less than the 11% rise in admissions revenues - but which also provide better margins without the same amount of capital commitment that its park attractions do.

Having emerged from Bankruptcy less than a decade ago, investors might be worried about Six Flags' ability to sustain its generous dividend. Six Flags' aforementioned high cash flow generation - it expects as much as $351 million in free cash flow by 2017 - should put investors at ease since it provides Six Flags with more than 6 years' worth of interest cover even after the company increased its total long-term debt to $1.8 Billion following its $300 million private debt placement.

In fact, even after the private debt placement, Six Flags' annualized interest expense should come in at less than $60 million - which is less than the approximately $107 million in dividends that it paid in the first half. In fact, we would argue that the fact that Six Flags was successful in placing its $300 million notes is a positive sign regarding its credit fundamentals - as is Moody's recent reiteration of Six Flags' stable credit outlook.

Six Flags is currently trading at 30-times its trailing earnings, which is lofty in a market that's already trading well above its historical median. That being said, Six Flags' revenues have been fairly robust in a weak economy and competition in the industry - that is, the propensity of consumers to shift from one competitor to the other, is stymied by the high barriers to entry for amusement parks. In that sense, we believe that Six Flags warrants a significant market premium.

Conclusion

In our view, Six Flags should see 12% earnings growth between 2017 and 2016 (it would need to do so in order to meet its Project 600 target and we see it earning $2.14 next year. This gives it a forward multiple of 25-times, which is above the current level for the S&P500 - but we believe this is warranted given the fact that beyond 2017, Six Flags should start seeing a significant EBITDA contribution from its overseas licensing partnerships.

Indeed, one could make the argument that its future earnings prospects warrant a 30-times multiple against our forward earnings estimate, which would give it a Target Price of $64.2 per share - within range of the consensus estimate of $63.75 per share - and a 20% upside. Combined with its 4.3% dividend yield, investors are looking at a nearly 25% total return from owning the stock.

All things considered, we believe that investors hunting for a solid high dividend stock should buy Six Flags. Its combination of a high (and sustainable) dividend yield, solid earnings growth prospects and potential price upside make it worth the ride.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SIX over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Black Coral Research, Inc. is a team of writers who provide unique perspective to help inform dividend investors. This article was written by Jonathan Lara, one of our Senior Analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article. Company financial data is taken from the company’s latest SEC filings unless attributed elsewhere. Black Coral Research, Inc. is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.