Six Flags: More Excuses, Potholes Ahead

| About: Six Flags (SIX)

At least Six Flags (NYSE:SIX) did not blame God for the results like they did in November. Six Flags reported a loss after preferred dividends of $132.4 million, or $1.39 per share, compared with a loss of $195.2 million, or $2.07 per share, a year earlier. This would lead folks to think things are getting better.

While the reported loss improved over last year, if we strip out the loss from discontinued operations in 2006, we find the loss from continuing operations in 2007 actually increased to $130.8 million, or $1.43 per share, compared with a loss of $100.5 million, or $1.12 per share a year earlier. So it was actually worse when we take an apple to apples approach.

For the full year, loss from continuing operations rose to $244.1 million, or $2.81 per share, from a loss of $207 million, or $2.43 per share. Essentially this means that what was there in 2006 and is still there in 2007, is performing worse.

No reason to put much weight in the "discontinued operations" when we are looking at it because they are "discontinued". Their inclusion is an accounting necessity, it has no effect on the company going forward. "Continuing operations" will tell us more about the future and it is not good. Why?

Six Flags blamed the higher loss from continuing operations on increased charges related to the removal of some inefficient rides and attractions, as well as higher stock-based compensation costs. The amount was partially offset by improved revenue. Bull.

Six Flags' (SIX) annual sales increased to $972.8 million, up 3% from $945.7 million. Here is the thing. If your sales increase, and your loss increases, there are only two options:

  1. Your sales level is not high enough to support operations.
  2. You are doing a lousy job managing expenses.
That is it. Ignore every other excuse they keep spinning out at you. It is not the weather or anything else they say. Of the two, #2 is the preferable situation. Get in new management that can control costs, and you will see immediate improvement. If it is #1, your only real choice is to spend more cash to draw more people in, or, reduce the consumers costs to keep them coming back. Either of those will cause the bottom line to worsen before it gets better.

Which one is it? Who knows. It is hard to tell, because you really cannot trust much of what they tell you. Because of that, any investment in shares is a shear gamble. It may pay off, but the odds are against it.

Earnings Call

Just finished the Six Flags (SIX) earnings call and something jumped out that ought to make any potential investor pause. Currently Six Flags' cash position sits at the end of Q4 with over $28 million in unrestricted cash and $5 million drawn on a $275 million credit line. But, they have preferred stock outstanding that’s mandatory redeemable in August of 2009 for $288 million.

In addition, $280 million of senior notes mature in February 2010. They intend to address these "financial obligations through one, or a combination of refinancing, exchanges and/or asset sales" said CFO Jeff speed. It is important to note that the company has yet to have a year that it finished cash flow positive and 2007 was no exception. According to Speed:

...assuming 2008 attendance is flat to 2007 at 24.9 million and conservatively assuming roughly 1% guest spending growth, $51 million revenue target for our sponsorship and international business, the full year benefit from our investments in Dick Clark Productions and Six Flags Discovery Kingdom of $7 million and the low end of our cost savings range or $50 million. The result is $270 million of adjusted EBITDA compared to $190 million in 2007. To complete the free cash flow picture our CapEx is still projected to be $100 million and our cash interest, dividends and taxes are expected to come in at $195 million, $30 million less than the roughly $225 million we incurred in 2007.

As we will benefit from our new credit facility, the debt repurchases during 2007 and a recent three year swap that we entered into in February 2008 to lock in an all in rate of 5.34% on $600 million of our $850 million floating rate term loan. Taking all of this into account and again assuming for this purpose no attendance growth, we’d be within $25 million of positive free cash flow. To close this gap with only attendance we’d need to grow attendance a bit less than 3% to 25.6 million to be free cash flow positive for the first time in the company’s history.

With the cost of a trip to one of its parks averaging $175 for a family of four, with the economy teetering and household wealth falling, one has to think holding attendance flat may be a bit tricky this year, much less increasing it.

That being said, we can now assume that 2008 will be another year of cash draining operations. When you couple this with mandatory redemptions in both 2009 and 2010 that will each be in excess of the company's current available credit, one must be leery of what lays ahead.

SIX will be forced to exchange the preferred for common (diluting shareholders even further), renegotiate another preferred that, given the current credit environment, will have far less advantageous terms than currently had (higher dividend) or, sell assets that will in effect lower revenues and extend losses. None of these are good.

The point here is that even if they do increase attendance by 3% in 2008, which is far from a probability or even likely, the company faces larger financial hurdles ahead in the next two years. If you are thinking of buying shares, currently priced at $1.63 a share, my guess is you could wait a couple years until things iron out either way and still not pay much higher.

Disclosure: No position.