Taking a look at the merger between Cedar Fair and Six Flags Entertainment; I just took spontaneous travel and minimalist packing to a new level
1) Today, I'll see whether there's an investment opportunity surrounding the merger between Cedar Fair (FUN) and Six Flags Entertainment (SIX)...
These two companies are the third- and fourth-largest amusement-park operators in the U.S., respectively. They're behind Disney (DIS) and Universal.
I'll note that I have a soft spot in my heart in this area. Taking my three daughters to amusement parks (usually Disney World) was one of the most fun things we did together during their childhoods.
I enjoyed it almost as much as they did – I actually liked going on "It's a Small World" 10 times in a row!
I don't go to amusement parks as much anymore because my daughters are all grown up now – they're 28, 25, and my youngest is 22 today. (So I'm waiting impatiently for them to give me grandkids!)
In the meantime, I still look for any excuse to go to a park – as I did when I was in Orlando at the ICR Conference back in January.
I had an afternoon free before my flight home, so I hopped over to Disney's Hollywood Studios to check it out and have some fun.
I wrote about what I saw and shared my analysis of Disney's stock in my January 12 e-mail, in which I concluded:
With longtime CEO Bob Iger back at the helm, activist Nelson Peltz rattling the bars of the cage, rationalization coming to the video-streaming industry, and Disney's fabulous parks business continuing to crank out cash, I think there's a good chance of an excellent outcome here.
I'm pleased to see that my instincts were right, as DIS shares are up 13% since then.
So turning to Cedar Fair and Six Flags...
The roughly similarly sized companies announced an all-stock merger in November, with the deal expected to close within the next couple of months (the Department of Justice is reviewing the merger and has asked for information, but I don't think regulators will seek to block it).
Cedar Fair and Six Flags each have a market cap of about $2.2 billion today and, with debt, their combined enterprise value is currently around $10 billion.
These stocks have been popular among value investors for decades – in fact, Cedar Fair has been written up six times and Six Flags nine times on my favorite stock idea website, Value Investors Club, dating back to 2002.
Sure enough, someone with the handle Kevin155 (everyone is anonymous) just posted an excellent analysis a few days ago. (Value Investors Club members can read it here.)
As regular readers of my daily e-mail know, I occasionally share ideas that I've seen on the site. But only members can access ideas for the first 45 days after they're published, so I can't share the entire recent write-up on Cedar Fair and Six Flags.
So today, I'll share a few excerpts and my thoughts. To start off, here's Kevin155's overview:
I believe both FUN and SIX are currently under-earning and the merger will give the opportunity for FUN's seasoned management team to turn around SIX's underperforming parks while pursuing cost efficiencies at the FUN parks.
In addition, the combined company should attract a more institutional investors given its larger size and FUN's transition from a Limited Partnership to a C-Corp structure. From its [recent] price of $44/share, I believe FUN can double over the next 3 years.
Kevin155 then covered the history of both companies. He highlighted Six Flags' aggressive attempts to expand margins – "achieved through underinvestment in the parks" – while noting that Cedar Fair had "a more consistent management team who is focused on guest satisfaction."
You can see the difference in the two approaches in the below stock chart since late June 2010, when Six Flags emerged from bankruptcy.
Cedar Fair's stock lagged for eight years from 2010 to 2018, but it didn't fall as much during the recent tough times and hence has been the (slightly) better performer. Take a look:
Kevin155 believes that when Cedar Fair's management team takes over the combined company, shareholders will benefit – here's more from the post:
After the merger is completed, the FUN management team will run the combined company and I believe operating results will be more consistent going forward.
Adding FUN and SIX's historical results together shows a steadier combined picture, as SIX's years of over-earning are offset by FUN's years of heavy investment. Going forward, FUN's focus on higher margins will mitigate the period of heavy investment that SIX is entering.
Over the next few years, Kevin155 believes Six Flags' weaker operating performance could be fixed by following Cedar Fair's more consistent approach to pricing and how it offers a better guest experience.
And as Kevin155 says with future projections:
I believe the combined company can grow [earnings before interest, taxes, depreciation, and amortization ("EBITDA")] from $1.1bn in 2024 to $1.4bn in 2027 assuming $100m of synergies (50% of the $200m target).
This assumes modest 3-5% top-line growth: 1-2% attendance growth plus 2-3% revenue/visit growth. Note that attendance levels are far from peak as 2023 attendance levels vs 2019 were -5% lower at FUN and -32% lower at SIX (driven by the ill-advised pricing strategy). Also note that estimated 2027 revenue of $3.8bn and EBITDA of $1.4bn are well below the 2027 projections in the merger proxy ($4.1bn revenue and $1.6bn EBITDA).
And as Kevin155 concludes:
Assuming ~$200m/year of debt paydown, no share repurchases, and a 9.5x EBITDA valuation multiple, FUN shares could be worth ~$90/share in 3 years, which is a ~30% IRR [internal rate of return] (assuming the 2% current dividend is maintained).
Overall, I think this is an excellent analysis and an intriguing stock idea, so I'm going to be doing more work on it... Maybe I'll even go visit a couple of the parks and try to talk with someone in management.
However, I'm not fully convinced yet.
The key concern I have was raised by someone on the Value Investors Club message boards regarding competition – not from other amusement parks, but other forms of entertainment:
I think the more important issue is that theme parks have lost wallet share. IMO, this loss has led to market concerns about the future relevance of theme parks.
Specifically, within the leisure sector, since 2019, theme parks have been trailing in participation levels compared to the broader industry recovery curve.
As the comment on the message board continues:
In fact, other travel and entertainment segments have seen consumer spending grow at an annualized rate of approximately 12% in 2023 compared to 2019, surpassing the total consumer spending increase of around 7%. In contrast, theme park attendance remains 9% below pre-pandemic levels...
This is in stark contrast to sectors like golf, skiing, and cruising, which have experienced increases of approximately 20%, 13%, and 6%, respectively, compared to their 2019 figures.
And as the commenter concludes:
The lag in recovery paints theme parks as underperforming within the broader leisure marketplace post-pandemic, leading to investor concerns about a possible secular peak in the spending category. In other words, given the data over the last 4 years, is it not fair to be worried that theme parks might be the next movie theaters?
If you have an opinion on this, I'd love to hear it! As always, you can send me an e-mail by clicking here.
Again, the pitch has me interested enough to look into it further. And if my team and I decide to pull the trigger, Stansberry's Investment Advisory subscribers will be the first to know...
(If you aren't already an Investment Advisory subscriber, you can find out how to get started for 75% off the regular price for the first year by clicking here.)
2) Longtime readers know that I love to travel – the more spontaneous the better – and, when I do so, I try to pack as little as possible.
This past weekend, I took it to a new level...
My wife Susan had left on Friday morning for her 35th college reunion. And at 6 p.m. that evening, I happened to be looking at the French Open draw when the idea popped into my head...
Why not fly to Paris for the weekend and see some first-round matches?
Long story short, within the hour I found a cheap flight that night at 1 a.m. on a discount carrier called French Bee (which I had never heard of), found a friend to take care of the dogs, and I was off to the airport.
I also reached a new high (some would say "low") of minimalist packing...
I didn't even bring a small backpack or a single item of clothing beyond what I was wearing. (I can hear the groans already, but I washed what I needed to in the sink and they dried overnight!)
Instead, I put the fishing vest I bought specifically for this purpose to good use, as you can see in the picture below:
I arrived on Saturday afternoon and had a busy rest of the weekend.
I visited Notre Dame and the Eiffel Tower... took a cruise on the Seine... and then spent 12 hours each day on Sunday and Monday binging on tennis matches (huge thanks to two friends who hooked me up with tickets!) before flying home early yesterday morning.
I posted more pictures and details on Facebook here and here.
Best regards,
Whitney