The Market’s Got This High-Yielder All Wrong
Check out this stock chart.
This is the part where a financial writer would normally make some kind of half-hearted analogy to a roller coaster ride. It would certainly be fitting in this case, not only because of the stock’s stomach-churning ups and downs, but also because it belongs to none other than Six Flags (NYSE: SIX).
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Six Flags knows a thing or two about adrenaline-inducing rides. It has constantly raised the entertainment bar over the years, introducing thrilling attractions such as Goliath, the world’s fastest and steepest wooden coaster, and Zumanjaro, the world’s tallest drop ride (41 stories at 90 mph). It has even just given us the first looping virtual reality coaster.
As the world’s largest regional theme park owner, Six Flags operates 145 roller coasters (925 total rides) that delight more than 30 million North American visitors each year. But it’s shareholders who have really been taken on a ride the past few weeks.
After peaking near $60 in late August, SIX shares have gone into freefall, bottoming in the lower $40s. That downhill slide was sudden — and as I recently explained to my High-Yield Investing readers, undeserved.
What’s Behind The Drop?
The market was clearly unhappy with Six Flags’ third-quarter results.
Did attendance plummet, leaving the parks empty? Far from it. The company’s 26 parks welcomed 14 million guests through the turnstiles between July and September, an increase of 3%. Through the first nine months of the year, attendance rose by 1 million to 26.7 million — a new record high.
So maybe expenses shot higher, draining profits? Again, no. Operating costs and general administrative expenses ate up just 38.8% of revenues, compared with 39.4% a year ago. So Six Flags is actually operating leaner. In fact, adjusted EBITDA for the quarter rose to $307 million — also a new record high.
Net income did slip by about 2%. But that’s largely due to tax law changes. I suspect there was also some disappointment that per-capita guest spending came in flattish at $42.44, versus $43.04 a year ago. There’s a good explanation for that. Six Flags is doing a great job of upselling casual visitors to season pass holders. That puts downward pressure on ticket revenues on a per-guest basis.
But these season ticket holders will make multiple visits — spending money on food and drinks, games and merchandise each trip. That means they generate more revenue over an entire season. We can see that in in-park spending, which has increased by nearly $30 million over the past 12 months to $575 million.
While perhaps mildly underwhelming, none of this warrants such a punishing decline. The market has just discounted the stock by about 30% — even with attendance and cash flows setting record highs.
Curiously, the selling pressure really intensified once management said that Six Flags is no longer pursuing a merger with rival Cedar Fair (NYSE: FUN). There was reportedly a $4 billion offer on the table that was rejected in October.
While such an acquisition is intriguing, the market didn’t react positively when a possible deal was first announced, so the negative reaction now is puzzling.
Here’s a condensed version.
Six Flags: We might be in talks with Cedar Fair
Mr. Market: *Crickets*
Six Flags: Nevermind.
Mr. Market: Boo! Hiss!
Action To Take
Six Flags will continue to do just fine on its own without Cedar Fair. In fact, the company is on track for its tenth consecutive year of record results. And it has just brought a highly-touted new CEO from Pepsico on board.
With all this in mind, I am taking advantage of this dip and accumulating more shares for my High-Yield Investing portfolio– locking in today’s elevated yield of 7.5%. If you’re looking for a truly rare combination of value and high yield, then you should consider doing the same.
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