Much like the roller coasters that sweep the skylines of its parks, Six Flags Entertainment Corp. (NYSE:SIX) has had its share of ups and downs over the last few years. Officially the world’s biggest amusement park corporation in terms of physical size, Six Flags has had trouble living up to this billing in other facets of its business. As of last fall, insiders had been buying the stock at $30-$32 a share, though one prominent shareholder has recently begun to trim his holdings of SIX. Although the company has now reached a fortunate market valuation of nearly $47 a share, earnings difficulties and overvaluation indicators have investors feeling more like Clark Griswold than Clark Kent.
Looking at hedge fund activity, sentiment on the stock has been mixed. As of the end of last year, Altai Capital, Eagle Value Partners, Corsair Capital Management, and Stark Investments all sold about a quarter of their holdings in SIX. However, firms like H Partners Management, Trafelet Capital, and Braham Capital held significant portions of the stock and elected not to downsize. On the whole, there were 24 hedge funds with SIX positions at the end of the third quarter, with that number increasing to 28 at the end of the fourth quarter. Even though hedge fund interest has been increasing slightly, it is worth delving a little deeper into H Partners Management because the fund’s manager Rehan Jaffer is also a large shareholder of SIX. Jaffer purchased 5,565,638 shares of the stock at $72 apiece last April, after which the stock split, meaning the real cost per share was $36. On March 28th, 29th and 30th of this year, he parsed sequentially increasing amounts from his portfolio each day, and in total, 147,700 shares were sold at an average price of $47.09 for a 30 percent profit. While these sales do not represent a major portion of Jaffer’s holdings in SIX, the circumstances surrounding these transactions – they were incrementally larger – may be a sign that more selling is to come in the future.
Adding more uncertainty to the mix, fundamental analysis of Six Flags gives investors reason to pause. In part, constant earnings shortfalls have made it increasingly difficult to justify the stock as a sound investment; SIX has missed on four of its last five quarterly earnings estimates. Just look at the company’s most recent earnings release in the fourth quarter of 2011 for an explanation of why this may be a regular occurrence. In this, corporate executives stated that the company reached sales goals, but missed the earnings mark by 20 percent, meaning that bloated expenditures are likely to blame. By looking at the income statement, we can see evidence of this sort of fiscal mismanagement. From Q3 to Q4 of 2011, revenues fell by $313 million, which was expected due to the seasonal nature of amusement park attendance. Unexpectedly, operating expenses were only trimmed by $61 million, forcing the company to report an overall loss on the quarter, translating into an earnings-per-share of -$1.85.
Now, negative EPS figures make it difficult for investors to properly value a company – traditional Price-Earnings ratios are now useless. As an alternative, we can use the Forward P/E, which uses earnings forecasts from a collection of analyst estimates. With a Forward P/E of 52.5X, SIX is overvalued in comparison to all of its major peers in the tourism and leisure industry, including Vail Resorts, Inc. (NYSE:MTN) at 35.7X, Town Sports International (NASDAQ:CLUB) at 17.3X, Life Time Fitness, Inc. (NYSE:LTM) at 16.1X, and International Speedway, Inc. (NASDAQ:ISCA) at 15.4X. Additionally, the current industry average P/E is 17.8X, shedding further light on SIX’s inconvenient truth.
For another way to compare Six Flags with its peers, we can use the Price-Earnings-Growth ratio. The PEG ratio is a commonly used gauge of a stock’s fair value, and the lower the better. In the typical financial literature, a stock with a PEG ratio below 2 is undervalued, between 2 and 3 it is fairly valued, and above 3 it is overvalued. Going through the same companies mentioned above, the 5-year expected PEG ratios are as follows: SIX at 5.08, MTN at 6.07, CLUB at 1.92, LTM at 1.20, and ISCA at 2.01. While we can see that Six Flags is not the most overvalued company amongst its competitors, it is definitely overpriced at its current market value. There may be better stocks in the tourism and leisure industry that investors can capitalize on. A year and a half ago we analyzed insider transactions in CLUB and were extremely bullish about the stock. It gained 400% since then (read our insider trading report). We still like the stock.
Finally, it is worth mentioning that Six Flag’s management is aware of these shortcomings, and in an attempt to offer more stability to investors, quarterly dividends have been increased tremendously. What used to be a payout of 6 cents per share is now 60 cents per share, amounting to a current dividend yield of 5.10 percent. This is certainly an impressive return, but it is possible that SIX’s earnings difficulties and overvaluation may place downward pressure on the stock that will outweigh this dividend boost. All in all, Six Flags Entertainment Corp. (SIX) is an uncertain investment at this moment.