Six Flags Speculative Opportunity?

Bill Cara for the Trader Wizard

TW Networker MH sent long a note that if I felt so strongly about a return to consumer cyclicals, family entertainment values, theme parks and USD-related foreign tourism, which was my rationale for recommending Disney (the day before), maybe I ought to look at Six Flags (NYSE: PKS).

I immediately thought back to when in the early 90's I owned a business in Grand Prairie TX about two miles north of Six Flags Arlington, next to the home of the Texas Rangers baseball team. Good thoughts then turned sour as I looked at the PKS financial data. What a dog's breakfast.

Beauty is in the eye of the beholder, I suppose. So with the interests of speculators in mind (of which I do not put myself into that class), I thought I'd look further.

First off, the figure that popped off the page was that the capital invested per share is $40, but with the recent operating losses the stock is down to $4.92. So I thought maybe there is a real-estate play here.

Then I saw that the price to book value is just 0.49 and there is $1.91 cash per share on the books. So what if the cash flow per share is "$2.67 for the Last Twelve Months. And so what if the current earnings per share is -$0.90. Just maybe there are some valuable assets here, and that's what speculators look for. Right?

So, after I saw that the profitability ratios and solvency ratios were as bad as I anticipated, I then looked at the latest news and there was exactly what I was looking for;

It seems that Wall Street bankers Lehman Bros don't think Six Flags is such a deadbeat after all. They are willing to buy up the $39 million (15%) greenshoe option under the $260 million debt placed earlier.

That debt issue will provide the funds needed to roll over mid-term 9.5% and 8.875% debt for long-term 4.5% debt. Of course all these notes are convertible, and with interest rates on the rise, I expect them all to be converted to equity, so I thought I'd check out just how bad the sweeteners are. Investors have to look at the terms just to see what the upside on the stock might be;

I see from this week's Six Flags 8K SEC Filing that over the next 11 years, the holders of each $1,000 principal convertible 4.5% note can redeem the notes and receive bonus shares according to a formula. Here is the formula;

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In my view, this convertible debt deal looks like a win-win for a company that was rapidly dying. The company now will be able to service its debt and stay in the game until tourists and local visitors return to their parks. And they will.

Here is a chart that I thought was particularly relevant. It shows the rise in free cash flow over the past couple years. Soon the 9-11 fear will be virtually removed from the equation and people will be flocking to these theme parks. I expect to see that free cash flow will continue to grow, and that, in my opinion, is the story behind Six Flags;that cash flow plus the value of the real estate of this company.

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The one thing that stared at me while looking at the past two-years stock chart was the stock price collapse each of the past two summers. So investors might want to take their families to the parks in the summers and then begin to accumulate the stock just about the time the kids go back to school.

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Actually, should there be a pullback in equity markets, taking PKS down from here to the $4.75 level, I'd be a buyer with a 10 percent upside target within four months, as a minimum. But Six Flags represents a speculation, and I don't have the time to read all its filings, follow the news and the charts, and be ready to play the call options.