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Monday, November 28, 2022

Six Flags is a ride you don’t want to get stuck on

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Six Flags entertainment (NYSE:SIX) is up more than 13% on a day when the market staged a relief rally of epic proportions. It shouldn’t be. The company posted revenues that confirmed a trend of two consecutive quarters of lower revenue and profit year-over-year.


MarketBeat.com – MarketBeat

Revenue came in about 8% below estimates at $504.83 million. That was a long way from the $638 million it raised in 2021. And it was also less than the $621 million that Six Flags delivered in 2019.

Earnings were a similar story. Earnings fell nearly 13% (12.86%) to $1.39 per share. That was less than the $1.80 it made in the same quarter in 2021 and the $2.11 it made in 2019.

So the bump in the company’s stock is likely the effect of investors’ exuberance over a lower-than-expected CPI number and the likelihood of a stalemate in Washington D.C.

But like a good roller coaster ride, that kind of adrenaline rush is fleeting. And investors should be careful about their next move with SIX stocks.

Recessions make us all liars

Well, maybe not all of us. But I predicted better days ahead for Six Flags when I wrote about the shares for MarketBeat in the middle of the summer of 2021. At the time, the company hadn’t published its second-quarter earnings, and I predicted bullishly that the sales numbers would surprise positively.

And for a few quarters, they did just that. Operations returned to pre-pandemic levels. And when I wrote about Six Flags competitor Cedar Exchange (NYSE:FUN) in August I suggested that the good times can keep rolling. When money is tight, theme parks can offer family entertainment just one tank of gas away.

But that’s where inflation comes in. Earnings and earnings are not bad, but they are lower year on year. And they are lighter from pre-pandemic levels. The company is somewhat shielded from inflation because the two biggest cost factors (building parks and new attractions) are fixed. And consumers are used to paying more, so rising food and drink prices in the parks may work.

But now that the economy is in recession by generally accepted standards, consumers seem to be retreating even more. And that makes me less excited about the prospects for SIX stocks.

Debt hangs over the company

I like amusement parks. But in good times it is hard business and in the last recession Six Flags went bankrupt. I’m not suggesting that will happen now. But the company reported $2.28 billion in long-term debt, compared to just $74.8 million in cash and cash equivalents.

That indicates that more capital will be needed to fund operations as the company enters the slower part of the year. And with interest rates still rising, those dollars will become much more expensive.

Prior to the earnings report, Jefferies Financial Group’s David Katz downgraded SIX stocks and lowered the price target to $24 per share. That takes away most of the advantage the stock offered. And once the market has processed this earnings report, more downgrades are likely to follow.

Various results play a role for the economy in 2023. But consumers will need to see evidence of a turnaround before adjusting their spending habits. Going downhill on a roller coaster is fun, but it’s better to sell SIX shares now and buy them when the outlook is clearer.

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