Merger And Decisive Investments Position Company For Robust Growth Amid Operational Challenges

Key Takeaways

• Merger with Cedar Fair, LP aims to reduce earnings volatility through a diversified portfolio and expanded geographic presence, enhancing revenue and net margins.
  
• Strategic focus on enhancing guest experiences and operational efficiencies anticipates driving long-term revenue growth and profitability through increased attendance and spending.
  
• Merging with Cedar Fair and external factors like weather impact attendance and finances, along with strategic challenges in investments and operational days affecting margins.

Catalysts

Operates amusement-resort in North America.

• The merger between Cedar Fair, LP and Six Flags Entertainment Corporation creates significant scale, an expanded geographic footprint, and a more diversified portfolio, potentially mitigating weather-related and seasonal earnings volatility, which could positively impact revenue and net margins.
  
• Expected improvement in legacy Six Flags parks through attendance and revenue growth by enhancing the guest experience, offering more attractive season pass options, and introducing new rides and attractions likely aims to drive top-line growth and improve net margins.
  
• The commitment to capital investments in new attractions and park enhancements aimed at driving demand and guest spending supports expectations for revenue growth and enhanced profitability over the long term.
  
• Enhanced operational efficiencies and cost synergies identified post-merger are expected to improve the combined company's bottom line by reducing redundancies and operational expenses, beneficially impacting net margins.
  
• Continued focus on increasing season pass sales and enhancing add-on offerings such as all-season dining and fast lane access anticipates driving recurring revenue streams, improving attendance, and boosting in-park per capita spending, directly benefiting revenue and earnings growth.

Assumptions

• Analysts are assuming Six Flags Entertainment's revenue will grow by 32.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.8% today to 15.6% in 3 years time.
• Analysts expect earnings to reach $677.0 million (and earnings per share of $5.0) by about September 2027, up from $127.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 84.7x on those 2027 earnings, up from 32.7x today. This future PE is greater than the current PE for the US Hospitality industry at 19.5x.
• Analysts expect the number of shares outstanding to grow by 96.37% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.35%, as per the Simply Wall St company report.

Risks

• The integration process and operational adjustments following the merger with Cedar Fair could create operational disruptions or distract management, potentially impacting revenues and profitability.
  
• Weather conditions, including the impacts of Hurricane Beryl and record heat and rain, have already shown to affect attendance adversely, potentially impacting future revenue if such trends continue.
  
• The reliance on season pass sales and the need to drive attendance, especially in legacy Six Flags parks which have shown lower visitation rates, could pressure admission per capita and in-park spending, affecting margins.
  
• Significant investments in CapEx for improving park offerings and attractions are necessary to drive growth and enhance guest experience. However, this requires careful balancing to ensure ROI, impacting net margins.
  
• Strategic decisions to increase or decrease operating days at parks could impact attendance and revenue, requiring careful management to optimize financial performance without eroding the guest experience.

Valuation

• The analysts have a consensus price target of $59.36 for Six Flags Entertainment based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $67.0, and the most bearish reporting a price target of just $48.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.3 billion, earnings will come to $677.0 million, and it would be trading on a PE ratio of 84.7x, assuming you use a discount rate of 8.4%.
• Given the current share price of $41.67, the analyst's price target of $59.36 is 29.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.