Why Recovery Remains Elusive For Six Flags Entertainment’s Stock Despite 50% Drop?

Six Flags Entertainment’s stock (NYSE: SIX) has seen lot of movement so far this year – dropping by about 78%, from $45 at the beginning of 2020 to $10 as on 18th March 2020, as growing fears around the coronavirus outbreak triggered a sell-off across global equity markets. But with the US government announcing a string of measures to keep businesses afloat, investor sentiment improved over recent weeks – helping SIX’s stock to recover 130% in the last two and a half months to reach $23 as on 29th May 2020. Though the current stock price is still close to 50% lower than the level at the beginning of the year, we believe that SIX’s stock is likely to hover around the current level as the world still awaits the sign of abatement of the pandemic. Our dashboard What Factors Drove -61% Change In Six Flags Entertainment Stock Between 2017 And Now? provides the key numbers behind our thinking.

SIX’s stock price has continuously decreased over recent years, from $59 at the end of 2017 to $45 at the end of 2019. The stock further almost halved in 2020 to about $23 currently. The stock price decline between 2017 to 2019 was primarily driven by a 36% decline in the profitability of the company. The net income margin declined from 23% in 2017 to 14.8% in 2019, with the majority of the drop coming in 2019, more than offsetting the 9.5% rise in revenues between 2017-2019. Margins declined due to higher operating expenses related to operating and rebranding 5 new domestic parks started in 2018, and higher costs to lease and operate other new facilities started during 2018 and 2019; along with an increase in interest cost as a result of higher borrowings. This led to a drop in EPS from $3.15 in 2017 to $2.12 in 2019.

The P/E multiple increased modestly from 18.7x in 2017 to 21.1x in 2019 as the drop in EPS was sharper than the stock price decline. However, the multiple plunged in 2020 and stands at 10.8x currently. The drop in multiple in 2020 was due to the impact of coronavirus, which we explain below.

Effect of Coronavirus

With almost all major cities being locked down due to the spread of coronavirus, there has been a slowdown in economic and industrial activity. SIX’s stock is down almost 40% since January 31 after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index saw a decline of only about 5.6%. The ongoing lock down of major cities and economic slowdown has adversely affected the company’s theme parks business which has virtually seen idle rides and empty properties due to a complete shutdown. Theme parks and merchandise & food (which in turn depends on footfalls at theme parks) makes up about 93.5% of the company’s revenues. Thus, the lockdown is taking a toll on almost the entire business of Six Flags Entertainment Corp. This compares unfavorably with rival Disney which gets 38% of its revenue from parks and resorts. Here’s how Disney’s stock has moved over recent times.

Six Flag’s Q1 2020 saw a 20% drop in revenues while losses increased 22% year-on-year. This was mainly due to loss of attendance due to suspension of operations at theme and water parks from 13^th March 2020. Thus, Q1 only saw a partial impact of the current crisis. SIX’s Q2 results are likely to reflect the gravity of the situation with a sharp deterioration in performance. This is in fact a huge blow to the company which earns 75% of its revenues in Q2 and Q3 of a year. If there are no signs of containment of the virus by end of June 2020, SIX’s stock could see a sharp drop from its current level. Until then it is unlikely that the stock will recover to its pre-crisis levels anytime soon. In the near term, SIX’s stock could hover around the current level of $22-$24.

Our dashboard forecasting U.S. COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. The complete set of coronavirus impact and timing analyses is available here

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