Shares of Six Flags (SIX) plunged on Friday morning after the company reported lower North America attendance as well as "continued challenges" in China. Analysts at Wells Fargo and Janney Montgomery Scott downgraded the stock after it warned of a fourth quarter shortfall and disclosed trouble with the development of parks in China.
Q4 REVENUE SHORTFALL: Six Flags disclosed in a regulatory filing that the company's North America parks experienced lower attendance in the fourth quarter of 2019 versus the same period in 2018. It now expects total revenue in the fourth quarter of 2019 to be less than prior year by $8M-$10M. The company said the outlook is due to to softer than expected season pass and membership sales, primarily during the holiday sales periods. Prior to this morning's update, analysts have been calling for Six Flags to report Q4 revenue of $285.63M.
CHALLENGES IN CHINA: Separately, Six Flags said that given continued challenges in China, the development of Six Flags-branded parks has not progressed as expected due to the macroeconomic environment and the declining real estate market in China. It said that Riverside Investment Group, its partner in China, "continues to face severe challenges due to the macroeconomic environment and the declining real estate market in China," leading Riverside to default on its payment obligations to Six Flags. The company said it will not realize any revenue from the China agreements, and expects a negative ($1M) adjustment and a $10M charge in the fourth quarter. For 2020, Six Flags said that while it does not foresee any significant additional one-time costs or expenses irrespective of the outcome of the Six Flags-branded projects in China, the loss of all the China projects would result in no revenue for that market if Riverside does not fix the default and the company is not able to engage other partners to complete any of the projects.
WELLS FARGO DOWNGRADES SIX FLAGS TWICE: Analysts at Wells Fargo and Janney Montgomery Scott downgraded the stock, with Wells Fargo analyst Timothy Conder cutting the stock to Equal Weight, then further lowering his rating to Underweight upon further consideration. In his first note, Conder said that a key pillar supporting his thesis, ramping international China revenue and EBITDA, "appears to be rapidly crumbling with the realization timeline now very uncertain." Six Flags' valuation multiples will be constrained to the lower end of historical forward ranges until international clarity emerges, Conder said, adding that while the company's dividend remains secure, sufficient upside stock catalysts are lacking especially considering consensus 2020 estimates and sentiment "remains too bullish. In his second downgrade note, Conder said Six Flags' preannouncement of "disappointing" Q4 pass and membership trends add to his previous China concerns and added that he sees no near-term upside catalyst. He believes investors likely will not give Six Flags any near-term credit until clarity on domestic demand emerges.
Meanwhile, Janney Montgomery Scott analyst Tyler Batory downgraded Six Flags to Neutral from Buy, saying he read the disappointing Q4 attendance and softer than expected season pass sales as "clear indicators" that trends in the core business keep deteriorating. He also said its China partner's default creates uncertainty about whether the parks there will ever open, making it hard to defend the stock. Additionally, he believes the dividend could be at risk.
WHAT'S NOTABLE: Prior to Six Flags' regulatory filing, Wedbush analyst James Hardiman downgraded shares on Monday to Neutral, saying that 2019 was a disappointing year for Six Flags, and although he would argue that this is already factored into the valuation, questions about the international business, the sustainability of the dividend, and a fresh/differing perspective of an incoming management team are enough to give him pause with respect to his bullishness until a number of these items are sorted out. Hardiman weighed in on Friday, lowering his price target to $34 from $44. Hardiman said that what he finds most significant is that Six Flags admitted that outcomes "could range from the continuation of one or more projects to the termination of all the Six Flags-branded projects in China," adding that he does not see how the company's current dividend makes sense if revenues from Chinese developments go to, and stay at, zero.
PRICE ACTION: In morning trading, shares of Six Flags plunged nearly 18% to $35.97.