Some stock price action makes no sense at all.
Theme park operator Six Flags Entertainment Corp. (SIX, Financial) is a perfect example of shares that have done very well over the past five years without any obvious reason why.
The company went bankrupt in 2009, wiping out its old shareholders while turning control over to bondholders in lieu of principal and interest owed.
Six Flags became public again just a year later. The discharged debt and new $750 million equity infusion made its name brand parks attractive again. At the time of the latest initial public offering, the company sported positive working capital and nearly $8 per share in book value. The company paid a modest dividend of two cents in 2010.
Did current management learn from Six Flags’ previous failure, when excessive debt pushed it into Chapter 11? Apparently not. As of June 30, working capital was about zero and total debt had ballooned to more than $2 billion. The company had inexplicably reinstituted a defined benefit pension plan. Most of Six Flags’ employees are seasonal and non-career. The plan was clearly designed to benefit company executives. By the end of 2016, it was already more than $38 million underfunded.
Over the most recent half-decade, most key metrics had gotten weaker while debt grew. Much of the damage was self-inflicted. Management used precious capital and newly borrowed money to buy back shares, ramp up dividends and support the stock price.
From 2012 through 2017, working capital and shareholder equity declined drastically. Long-term debt expanded by more than 62%. All those factors should be viewed negatively.
Instead, in a zero interest rate policy (ZIRP) environment, "dividend growth" investors cheered. Six Flags surged from near $20 at the start of 2012 to peaking at north of $65 earlier this year. As of Sep. 1, the stock had regressed to $53.82.
Do not be tempted by that 17.4% decline.
Traders who bought Six Flags’ peaks in 2016 and 2017 are now well underwater. The stock’s yield has not been covered by earnings since 2011. Capital spending is still needed, and growing, in order to keep the parks fresh.
Traders basing decisions on yield alone made money buying when above-average current yields were in effect (green-starred). Six Flags’ two “should have sold” moments (red-starred) offered below-average yields.
Six Flags now sits near a middle-of-the-road valuation, even if a small hike is still in the cards.
Company officers and directors have been voting with their feet. This year alone, insiders cashed out almost $17 million of stock. Most was sold close to this past April’s all-time high.
On Aug. 29, there was a tiny by comparison, $157,743 insider purchase after the stock dropped back into the $52 range.
Six Flags is only marginally attractive for investors willing to overlook its previous bankruptcy and poor balance sheet.
Value Line’s three- to five-year projections illustrate total return could even turn out negative for long-term, buy-and-hold types, despite the greater than 4.7% yield.
Independent research from Morningstar paints a similar picture on a purely computer-generated basis (they have no human analyst covering the stock).
Traders long Six Flags should consider selling on the next decent rally. Anyone thinking the shares could be as much fun as the theme parks might want to invest in a season pass rather than the stock.
Disclosure: No positions in Six Flags shares or options.
