Six Flags is a Ride You Don’t Want to Get Stuck On

Six Flags Entertainment (NYSE:SIX) is up over 13% on a day when the market is staging a relief rally of epic proportions. It shouldn’t be. The company posted earnings that confirmed a trend of two consecutive quarters where revenue and earnings are lower on a year-over-year basis.  

Revenue came in about 8% lower than estimates at $504.83 million. That was a far cry from the $638 million it generated in 2021. And it was also below the $621 million Six Flags delivered in 2019.  

Earnings were a similar story. Profits were down nearly 13% (12.86%) at $1.39 per share. That was below the $1.80 it delivered in the same quarter in 2021, and the $2.11 it delivered in 2019.  

So, the bump in the company’s stock is likely the effect of investor exuberance over a lower-than-expected CPI number and the likelihood of gridlock in Washington D.C. 

But like a good roller coaster ride, that type of adrenaline rush is fleeting. And investors need to be careful about their next move with SIX stock. 

Recessions Make Liars of us All 

Well, maybe not all of us. But I had predicted brighter days ahead for Six Flags when I wrote about the stock for MarketBeat in mid-summer 2021. At the time, the company hadn’t posted its second-quarter earnings, and I bullishly predicted that revenue numbers would surprise to the upside.  

And for a few quarters, they did just that. Operations were getting back to pre-pandemic levels. And when I wrote about Six Flags competitor Cedar Fair (NYSE:FUN) in August, I suggested that the good times may keep rolling. When money is tight, theme parks can provide family entertainment that’s only one gas tank away.  

But that’s where inflation enters the story. Revenue and earnings aren’t bad, but they’re lighter on a year-over-year basis. And they’re lighter from pre-pandemic levels. The company is somewhat shielded from inflation because the two biggest cost drivers (building its parks and new attractions) are fixed. And consumers are used to paying more so increasing prices of food and beverages inside the parks can work.  

However, now that the economy is in a recession by accepted standards, consumers seem to be pulling back even more. And that makes me less thrilled about the prospects for SIX stock. 

Debt Hangs Over the Company 

I love amusement parks. But it’s a tough business in good times and in the last recession Six Flags went bankrupt. I’m not suggesting that will happen now. But the company reported $2.28 billion of long-term debt compared to only $74.8 million in cash and cash equivalents.  

That signals that more capital will be needed to fund operations as the company gets into the slower part of the year. And with interest rates still on the rise those dollars will be much more expensive.  

Ahead of the earnings report, David Katz of Jefferies Financial Group downgraded SIX stock and lowered the price target to $24 per share. That takes away most of the upside that the stock offered. And once the market digests this earnings report, it’s likely that more downgrades will follow.  

A range of outcomes are in play for the economy in 2023. But consumers will need to see evidence of a turnaround before they adjust their spending habits. Going downhill on a roller coaster is fun, but it’s better to sell SIX stock now and look to buy it when the outlook is clearer.