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.

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