Disney Or Six Flags Entertainment: Which To Ride?

by Trefis Team
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Six Flags Entertainment stock (NYSE: SIX) has dropped by 66% 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 Disney (NYSE: DIS) has seen an increase of about 11% during this period. This is despite the fact that SIX’s margins have consistently been higher than DIS’, with only 2019 seeing almost similar margins of both companies. How then is there such a divergence in stock movement? Our dashboard Disney vs. Six Flags Entertainment: Does The Stock Price Movement Make Sense?  has the underlying numbers.

Sure, SIX’s margins have largely been better than Disney’s historically (2019 being an exception), but SIX’s margins have seen a continuous decline between 2017-2019, with its falling to about 15%, marginally lower than Disney’s 16%. As the same time, one of the key factors justifying the stock price movement is the size of the company. SIX’s revenues have increased by 9.5% from $1.4 billion in 2017 to $1.5 billion in 2019. During the same period, Disney registered a significantly higher revenue growth of 26%. Additionally, what is noteworthy is that this high growth was possible despite Disney’s revenue size being over 45x SIX’s revenues.

P/E multiple has been volatile for both companies over the years. However, Disney currently commands a higher P/E multiple due to its foray into the streaming world and a very positive response received by Disney+. SIX’s P/E is currently very low in comparison as theme parks and associated activities is one of the worst hit sectors due to the pandemic. Disney’s current P/E multiple stands at 18x, higher than 10x for SIX. So what along with revenue size and growth is driving this difference in price trend? It’s the revenue mix.

How Do Businesses Of Disney & SIX Compare?

Let’s have a closer look at the core business prospects. Both companies operate large theme parks catering to children and families. But what’s strikingly different is the revenue mix of these companies.

In the case of SIX, almost its 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, the company is expected to take a massive hit on its top and bottom line in 2020, as its facilities have been shut since mid-March.

In comparison, though Disney has increased its share of theme parks and resorts in total revenue, it still remains significantly low at 38% as of 2019. Thus it will not have its entire revenue base hit, unlike SIX. Additionally, Disney’s entry into streaming with the successful launch of Disney+ in November 2019, is providing tough competition to incumbents like Netflix and Amazon. With streaming expected to be around 20% of Disney’s total revenues in 2020, and with demand for streaming, in fact, increasing during the current crisis, it has been a saving grace for the company during this pandemic. Thus, the revenue hit to its theme parks and studio business is most likely to be offset to a large extent by this rise in streaming.

Six Flags Entertainment does not have any such business diversification to act as a buffer. This explains the sharp drop in its P/E multiple in 2020 so far and stands significantly lower than Disney (10x vs 18x). The surge in Covid cases over the last few days have led to fears of re-imposition of lockdowns in certain cities. In such a case, SIX’s stock could see a further downside from its current level and could go below $20. In contrast, Disney’s stock is likely to see a marginal upside with the continued strong performance of Disney+. As per Disney’s valuation by Trefis, we have a fair price estimate of $125 per share for DIS’ stock.

While Disney has managed to outperform Six Flags Entertainment, 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.

For further insight in to the theme park space, see how Six Flags Entertainment compares with SeaWorld Entertainment and how Cedar Fair’s stock has performed.


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