With the summer season upon us, theme parks and water parks are sure to be on many people's minds. So let's incorporate that into a potentially profitable trade idea and strategy.
Six Flags Entertainment (SIX) operates 24 water and theme parks in the U.S. as well as two in Mexico, and one in Canada. Serving an aggregate population of ~250 million within a 100-mile radius of its properties encompassing the top 11 metropolitan markets, the company is the largest operator worldwide in terms of number of parks and third in North America with regards to attendance, trailing only The Walt Disney Company's (DIS) Disney Parks and Comcast's (CMCSA) Universal Parks & Resorts.
Prior to the pandemic, Six Flags offered daily admission, season passes -- good for the calendar year at a specific theme park -- and memberships that permitted free attendance at most of its parks in return for a monthly fee. It goes without saying that the company's business was severely impacted by the pandemic when its theme parks were closed in March 2020 and then reopened with reduced capacities due to social distancing restrictions. Revenues fell some 75% in 2020.
Business didn't return to normal until the second half of 2021, when closures and capacity limitations at all its theme and water parks were removed. As such, attendance was still down 16% 2021 versus 2019, to 27.7 million from 32.8 million. However, Six Flags made up for the attendance shortfall with a 24% increase in total guest spending per capita, to $52.40 from $42.37.
After the company returned to somewhat normal operations, it announced a new CEO last November. Selim Bassoul's focus is on improving the parkgoer's experience to facilitate higher per capita spending. To that end, he has initiated several programs in 2022, including the termination of any new memberships in exchange for simplified but more expensive seasonal pass options, single-rider lanes on busy days to ease wait times, skip-line promotions, improved restaurant food quality and updating the parks' appearance. The new mantra is about less attendance, shorter waits for rides, and cleaner theme parks that will appeal to customers that can afford the higher outlay in exchange for a better experience.
Free cash flow will be invested back into upgrading the customer experience and used to pay down debt, not returned to shareholders in the form of dividends.
Six Flags is well liked in the analyst community despite some concerns around the negative impacts of high gas prices on consumer spending. In addition, beneficial owner H Partners Management, purchased 425,000 shares below $30 in mid-May, raising that firm's position to 9.35 million shares, or 11% of outstanding float.
The stock is attractive trading at 11x estimated 2022 earnings per share and a not outlandish enterprise value/trailing 12-month adjusted EBITDA multiple of 9.3x -- especially considering it is still returning to a full year of normal operations post pandemic. Six Flags' debt burden is somewhat high, but leverage will decrease in the coming quarters as cash flow is used to pay down debit.
This is how one can execute a covered call position in SIX. Covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Using the January $30 calls, fashion a covered call order with a net debit in the $24.50 to $24.65 range (net stock price - option premium). Options are liquid and the order should fill fairly quickly.
This strategy provides downside protection in the high teens and just over 20% of potential upside over the option duration if the stock does nothing.
(Bret Jensen is a regular contributor to Real Money Pro. Click here to learn more about this dynamic market information service for active traders and to receive daily columns and trade ideas from Paul Price, Doug Kass, Peter Tchir and others.)