Six Flags activist report highlights ‘a dislocation in the stock’: Analyst

Yahoo Finance Live is joined by James Hardiman, CITI Leisure Analyst, to discuss the fall in Six Flags stock amid the ongoing activist investor fight, declining real estate sales, investor sentiment and the future of Six Flags.

Video Transcript

BRIAN SOZZI Six Flags executives are under attack by Jonathan Litt, activist investor after a year of poor execution. Citi leisure and entertainment analyst James Hardiman will be joining us for more information on this battle. James, it’s great to have you with us this morning. What do you think the outcome of this one will be?

JAMES HARDIMAN Yes, I’m sure the activist report, which was published the other day, is a great conversation starter. It sparks discussion about what ultimately is a stock dislocation. It’s important to remember the reason we are here, however. We are here because the new strategy, which was introduced by the CEO about a year ago, has so far failed to produce results.

In fact, the stock has been moving in the wrong direction for most of the past year. This is because, in this space with assets that generate a lot cash, when you have that kind of underperformance or a poor performance, you will get some activism, some non-traditional alternatives to running the business.

JULIE HYMAN In this instance, the land and buildings propose a non-traditional option. They will either sell the real property or spin it off, and then put it in a trust for real estate investments. Then lease it back. Do you think this makes sense?

JAMES HARDIMAN It makes sense. This is not a new idea.

JULIE HYMAN Right.

JAMES HARDIMAN This idea was one that the company had evaluated in depth back in 2016/2017 and ultimately rejected. This has many aspects. Some of the valuation metrics used by activists are a bit too optimistic, however. Any move like this has serious tax implications.

But the longer the stock is here in the 20s, at one time it was in teens, the more you can argue for financial engineering. This is the essence of valuation arbitrage. This is the proposal. My guess?

There are many steps between. They don’t have to sell all of their real estate assets at once. It seems more likely that they will take one or two properties and lease them back as capital.

BRIAN SOZZI Stephen Purtell, Six Flags head of communications and comms, was our contact. I don’t know what he is doing, he just doesn’t feel like responding to us. James, I want to ask this question. What is the key to getting people back into these parks? What’s the problem with Six Flags Parks? Is the food bad? Are the rides dull? What can they do to re-launch or restart their business?

JAMES HARDIMAN Yes, there are two parts. The industry, right? There was some slowing across the entire industry during the summer. This is probably due to macro pressure. The theme parks tend to hold up better than other forms of entertainment.

This is where the company-specific aspects of this strategy come in. Six Flags came up with this strategy. We called it the Jerry Maguire Strategy – fewer clients, better service. Many people said they fired their customer in the end. The idiosyncratic aspect of this story is a mess. There is still hope that this strategy will work. They will have to figure out how they can win back at least some of the customers they lost.

JULIE HYMAN James, since we have you here during this holiday season where there has been so much discussion about people moving around and traveling, you also covered the cruise line operator. What are your thoughts on the state of the cruise industry at this time?

JAMES HARDIMAN There is still a lot to be concerned about, but there are also many opportunities. You see, so much of consumer discretionary right at the moment is focused on figuring out how recessions will impact these different categories. If you choose to call it that: a recession, even if just a temporary one, would be a significant improvement for the industry in comparison to the past few years. Are we finally seeing better pricing?

Pricing has risen in almost every category. Carnival recently announced that their pricing has increased compared to 2019. This is an area where there is potential. This industry has been historically resilient. There is a lot of risk. There is also weather risk. There is COVID, and other type of virus- or disease-related danger.

The war in Ukraine is big. When you consider people traveling to different parts of the globe, it is clear that the war in Ukraine is a problem. Obviously, fuel costs, right? This is their largest single expense line. There are many moving parts in this story. The entire cruise industry will be much more successful if we can go back two years or three years. We might take the scenic route, given how many external factors are able to move these stocks.

JULIE HYMAN Excellent wordplay. James, thanks so much. Happy holidays!

JAMES HARDIMAN Happy holidays.

JULIE HYMAN We appreciate you spending time with us today, and throughout the year. We are grateful to James Hardiman, Citi entertainment and leisure analyst.