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Six Flags-Cedar Fair merger offers 'stable operating model'

Jefferies analysts upgraded Six Flags Entertainment (SIX) stock to a "Buy" rating while raising its price target to $32 on the theme park operator's merger with Cedar Fair (FUN). Jefferies Managing Director David Katz — the analyst behind the upgrade call — characterizes Six Flags as lacking consistent strategy and management.

"The essence of our call this morning is that by putting the businesses together and defining a clear value proposition, providing a stable set of capital allocation frameworks around the business, it can go back to trading at that double-digit multiple level while returning capital..." Katz tells Yahoo Finance.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video transcript

BRAD SMITH: Well, a fun day for Six Flags. The stock is ticking slightly higher this morning after Jefferies lifted its rating on the amusement park operator to buy from hold. Jefferies also upping its price target by $7, now sitting at $32 a share. The investment firm believes that the merger of Six Flags and Cedar Fair will quote material increased value for shareholders.

Let's bring in the analyst behind that call, David Katz, Jefferies managing director and Equity Research analyst. You know, I've got to imagine this is a pretty fun job that you have here. You get to go on some of these theme park rides, the attractions, really get a good view of the scape here and tell consumers and investors whether or not the investments that companies like Six Flags are making is actually paying off. Is it paying off and what should investors expect over the long term after some of these investments, after some of the marketing, and this tie up with Cedar?

DAVID KATZ: Yeah, fortunately I don't have to go on any of the rides in order to reach our investment conclusions, which we have in our note this morning, but what I would say is, having followed Six Flags as a company, as an enterprise, for many years, it has lacked a consistency of strategy and management. It really has been challenged to define its value proposition to consumers, and I think that's been going on for a decade or more.

And what the Fun tie up, brings it is a stable operating model that Cedar Fair has, an experienced management team across the board, which Six has, you know, not had, and I say experienced with respect to the theme park business, which is not necessarily a growth business.

And so the essence of our call this morning is that by putting the businesses together and defining a clear value proposition, providing a stable set of capital allocation frameworks around the business, it can go back to trading at that double digit multiple level, while returning capital, while funding the business properly, instead of the seven and a half times at which it closed on Friday, and we're talking about cash flow and EBITDA, and that's the essence of our call this morning.