Oppenheimer Says Six Flags (SIX) Could Optimize Balance Sheet to Buyback $500M in Stock

November 13, 2012 12:17 PM EST
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Price: $60.54 +0.68%

Rating Summary:
    9 Buy, 5 Hold, 0 Sell

Rating Trend: Up Up

Today's Overall Ratings:
    Up: 30 | Down: 30 | New: 23
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Analysts at Oppenheimer commented Six Flags Entertainment (NYSE: SIX) Tuesday, saying they see an opportunity for the company to optimize its balance sheet which would free up cash for stock repurchases.

"With the peak season complete and cash about to flow into the company's coffers, management could look to optimize its balance sheet," the analyst comments. "We estimate a year-end cash balance of $240M and a leverage ratio of 1.9x, vs. 3.6x for competitor FUN. A modest, one-turn increase in leverage, when coupled with cash-on-hand, would allow SIX to repurchase over $500M of stock and could be ~10% accretive to cash EPS

The firm maintained an Outperform rating and price target of $63.00.

For an analyst ratings summary and ratings history on Six Flags Entertainment click here. For more ratings news on Six Flags Entertainment click here.

Shares of Six Flags Entertainment closed at $56.73 yesterday.

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Analyst Comments, Stock Buybacks


Golden Eagle Investments on 2013-03-14 00:19:15
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In the past two years, Six Flags stock price has more than doubled, from $30 to $69, and many people still believe it is a good buy.


Here we would like to share our objective view with you. It is always good to know the “true value” of a stock, rather than just follow the market sentiments.

To know how much a stock is worth, we need to check the profit Fix Flags makes. The past few years’ profit of Six Flags has been exactly same as its roller coaster----Loss of $229M in 2009, Profit of $599M in 2010, Loss of $24M in 2011, and Profit of $347M in 2012. No consistency in profitability is a true reflection of the business’ volatility.

When we look at the Free Cash Flow, we find no consistency either---minus $6M in 2009, $26M in 2010, $186M in 2011, and $344M in 2012. The cash flow seems ready to jump into the sky.


How profitable can Six Flags really be? Walt Disney net profit margin is 9%-13% in the past 4 years; Starbucks about 4%-10%; Goldman Sachs 13% to 26%. For argument’s sake, let us assume Six Flags can make 15%, much better than Disney and most of other companies. This means its profit for a regular year should be around $160M (15% multiply by $1.1B).

For such a business, what PE ratio should be applied? Market average today is 15. Given entertainment business is very susceptible to macro economy, and economy today is still very fragile, it is safe to say that PE ratio for Six Flags should not be over 15.

So the maximum market cap for Six Flags is $2.4B ($160M*15), or $48/share, assuming there are no significant risks hidden for this business.


Then why Six Flags stock price has reached $69?

Six flags stock price has been driven to $69 by the following factors: (1) High dividend payout ($180M a year, which is more than profit, unsustainable); (2) One-time profit from business sales ($70M); (3) One-time tax benefit ($180M); (4) Aggressive stock buyback ($200M in year 2012, another $220M in Jan/Feb 2013), mostly funded by incremental debt (the long-term loan increased from $1.0B to $1.4B in year 2012), unsustainable as well.

Interestingly, in the past few quarters, major top stockholders have gradually dumped Six Flags (please refer to InsideMonkey.com). The reason is simple and clear---why not take big profit now and have a good party rather than hold a big bubble that will burst anytime?

To keep holding Six Flags stock and hope the big bubble continue to grow, or to pass it to somebody else and secure the profit you have made? To an investor, it is not a question.

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