Six Flags Entertainment Or SeaWorld Entertainment?

by Trefis Team
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Six Flags Entertainment stock (NYSE: SIX) has dropped by 63% in the last two and a half years, when the stock dropped from $59 at the end of 2017 to near $20 currently. That’s bad news for SIX’s investors. But wait a minute, close rival SeaWorld Entertainment stock (NYSE: SEAS) has seen an increase of about 14% during this period. This is despite the fact that SEAS’ revenue and margins have consistently been lower than SIX’s. How then is there such a divergence in stock movement? Our dashboard SeaWorld Entertainment vs. Six Flags Entertainment: Does The Stock Price Movement Make Sense? has the underlying numbers.

Sure, SEAS’ revenue and margins have been lower compared to SIX, but SEAS’ net income margins have seen a steady rise in the last 3 years, from -16% in 2017 to 6.4% in 2019. At the same time, SIX’s margins have declined from 23% to 14.8% during this period. SEAS’ margins were unusually low in 2017 due to goodwill impairment which explains the sudden rise in 2018, but the margin continued to improve in 2019 as well, driven by lower operating expenses on account of reduction in labor costs as the company focused on cost efficiencies.

Improving efficiency and margins have led to SEAS enjoying a much higher P/E ratio compared to SIX over the last 3 years. With the outbreak of coronavirus affecting the operations of both companies, we saw a decline in P/E multiple for both theme park giants. However, SEAS’s current P/E ratio of 14x is higher than SIX’s 10x.

How Have Businesses Of SEAS and SIX Fared During Coronavirus?

Let’s have a closer look at the core business prospects. Both companies operate large theme parks catering to children and families. In the case for both the companies, almost their entire revenue comes from these park admissions, and merchandise & food (which in turn depends on footfalls at the theme parks). With almost all major cities being locked down due to the spread of coronavirus, there has been a slowdown in economic and industrial activity. The ongoing lock down of major cities and resulting 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. With the US being the most affected during this crisis, both companies are expected to take a massive hit on their top and bottom line in 2020, as their facilities have been shut since mid-March.

However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations vs historic valuations become important in finding value.

As the economy opens up, we believe SEAS is expected to benefit more due to its facilities being spread across the US, while most of SIX’s operations are concentrated in the eastern US. Thus, local factors would play a relatively smaller role in SEAS’ business. Though both companies are expected to see a massive drop in revenues and earnings, with investors’ focus shifting to 2021, we believe SEAS’ cost efficiency initiatives will help it recover faster than SIX, thus justifying its higher P/E multiple.

Despite SeaWorld Entertainment likely to outperform Six Flags Entertainment post-Covid, both companies compare unfavorably with Disney, as parks & resorts form about 38% of Disney’s revenues. With that, see  how Disney’s stock has moved over recent times.

After having an insight into the theme parks industry, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

 

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