Thursday, July 24, 2014

SIX: First look

I decided to take a look at Six Flags Entertainment Corporation (SIX) after seeing this article, stating that the dividend yield was over 5 percent.  Not that I had any specific idea about investing for yield or anything.  I just thought that if the dividend yield was that high, and if that dividend was sustainable, and if there were any growth possibilities, then this might make a good investment.  That's a lot of ifs to end up with a maybe, but that's really no different from other stocks.

It also happens that I've been thinking that entertainment stocks in general might provide good investments going forward.  Economic growth appears to be gradually ticking up, unemployment is down, and entertainment, at least according to my personal experience, appears to be a relatively high priority in consumer spending.

So, with that in mind, let's begin with a look at some of the current data, as reported on Yahoo Finance.  The trailing PE (32), forward PE (25), and PEG ratio (2.68), all point to a relatively overvalued stock on the basis of earnings.  A beta of 1.85 indicates relatively high market risk, and the debt/equity reported there is high at nearly 197, indicating a high level of leverage.  Cash per share is reported at $0.24 for the most recent quarter, not enough to continue paying the current dividend.  So far, SIX doesn't appear all that promising.

Turning to the annual balance sheet, we see that in 2012, the company increased long term debt by over $400 million, and in 2013, apparently sustained large enough losses to wipe out retained earnings, leaving the balance at -$439 million.  Yeah, that's negative.  Also negative, net tangible assets come in at -$619 million.

Strangely, looking at the annual income statement, income itself doesn't seem to be the reason behind the large decrease in retained earnings, as net income was positive for the last couple of years.  As it turns out, the reason for the large drop in retained earnings can be found in the annual cash flow statement.  The company repurchased nearly $500 million in stock.  Without looking at any news for the time period, it appears the SIX made a rather large adjustment to its capital structure, exchanging debt for equity in effect.  Not necessarily a bad choice, although it is a choice that might cause some investors to invest elsewhere due to the higher risk that debt represents.

Looking at the 5 year chart , the stock has done well over the period, significantly outperforming the S&P 500 over the period.  The last year tells a different story.

In summary, it appears that SIX isn't a growth story at all.  Rather, the company is leveraging the assets it already has in order to return value to its shareholders.  In good times, stockholder returns should be better than normal, but if things turn south, it could be a disaster, as leverage tends to magnify both the good and the bad.

Tuesday, April 1, 2014

Business ethics

CEO Barra calls GM's actions on deadly defect 'unacceptable'
Lawmakers are investigating why GM and regulators missed or ignored numerous red flags that faulty ignition switches could unexpectedly turn off engines during operation and leave airbags, power steering and power brakes inoperable.
 So, I wonder how long this investigation will go on.  It's simple, really.  It's the same thing that Ford (F) did with the Pinto years ago.  They did a cost/benefit analysis.  And not surprisingly, the cost of the fix, even if small, was more than the value put on human life.  Of course, it isn't really the value of human life, but rather the expected cost of not fixing the issue that is considered.
Under intense grilling by lawmakers, Barra said she found employee statements "disturbing" that cost considerations may have discouraged the prompt replacement of faulty ignition switches now linked to at least 13 fatalities and the recall of 2.6 million vehicles.
Bingo.  But is it really "disturbing?"  I don't think so.  This type of decision-making has been going on for as long as business has been done.  I'm not surprised, nor am I disturbed.  I suppose that this is why I'm not the CEO of a multi-billion dollar corporation.  I have too much trouble feigning surprise.

But, on the other side of the argument is this:
House Energy and Commerce Committee Chairman Fred Upton, a Republican, told Barra: "With a two-ton piece of high-velocity machinery, there is zero margin for error; product safety is a life or death issue. But sadly, vehicle safety has fallen short."
But drivers' recognition of vehicle safety has fallen short as well.  Or perhaps a better way to put it is that drivers don't tend to recognize how unsafe the very act of driving is.  Most people don't really think of driving a "two-ton piece of high-velocity machinery" as being anything like that.  Drivers these days seem to assume safety.  And when it isn't so, they are shocked and appalled.  Driving is dangerous, and no amount of effort on the part of automakers is going to change that.  The "safer" cars become, the faster everyone drives and the more aggressive drivers become.

Still, for this type of problem, GM (GM) should certainly be held accountable for their action, or inaction as it were.  But I'm pretty sure this was already considered in the cost/benefit analysis, and in the end, the result will be more of the same in the future.  Because, consumers will do their own cost/benefit analysis, even if subconsciously, and decide that the perfectly safe vehicle is not worth the cost.  Just like they made the same decision with seat belts when seat belts were a new thing.

While I usually reserve this type of commentary for my other blog, I chose to comment here because it is directly relevant to the ethics of business and finance, of which, despite what professional associations would lead us to believe, there are none.  Well, except for my ethics, of course.