After an impressive rise of 115% in Six Flags Entertainment stock (NYSE: SIX) since its March lows of this year, at the current price of about $22, we believe SIX’s stock has reached its near-term potential. SIX’s stock has rallied from $10 in March 2020 to $22 as on 8^th September 2020, a rise of 120% as against the S&P 500 which increased more than 50% during the same time. The stock was able to beat the broader market over recent weeks as the gradual lifting of lockdowns led to expectations of reopening of the company’s amusement parks sooner than anticipated earlier, which could drive revenue and earnings growth. Though the stock is more than 60% lower than the levels seen in the beginning of 2018 and 50% below January 2020 levels, we believe that the stock is unlikely to see any major movement in the near term. Our dashboard What Factors Drove -62% Change In Six Flags Entertainment Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

The stock price decline during 2017-2019 was primarily driven by a 36% decline in the profitability of the company. The net income margin declined from 23% in 2017 to 14.8% in 2019, with the majority of the drop coming in 2019, more than offsetting the 9.5% rise in revenues between 2017-2019. Margins declined due to higher operating expenses related to operating and re-branding 5 new domestic parks. This led to a drop in EPS from $3.15 in 2017 to $2.12 in 2019.

The P/E multiple increased modestly from 19x in 2017 to 21x in 2019 as the drop in EPS was sharper than the stock price decline. However, the multiple plunged in 2020 to below 5x in March, but has recovered since then and stands at a little over 10x currently. The drop in multiple in 2020 was due to its amusement parks being shut since March 2020 following the lockdowns imposed. We believe that following the recovery over the last few months, the P/E multiple will hover around its current level.

Timing of Stock Movement

The outbreak of coronavirus, the lock down of major cities, and economic slowdown has adversely affected SIX’s theme parks business which has virtually seen idle rides and empty properties due to a complete shutdown. Theme parks and merchandise & food (which in turn depends on footfalls at theme parks) makes up about 94% of the company’s revenues. Thus, the lockdown is taking a toll on almost the entire business of Six Flags Entertainment Corp. This compares unfavorably with rival Disney which gets less than 40% of its revenue from parks and resorts. See how SIX compares with Disney.

This was reflected in the recently released Q2 2020 results, where revenues declined by a large 96% y-o-y, mainly due to loss of attendance due to suspension of operations at theme and water parks from 13th March 2020. This is, in fact, a huge blow to the company which earns 75% of its revenues in Q2 and Q3 of a year. The recent spike in Covid positive cases is a concern for the theme park giant, but the stock has not seen a major decline due to this. This is because SIX’s lenders have extended a key leverage covenant waiver by a year to Q4 of 2021, with an additional covenant modification extended out to 2022. This suggests that the lenders are willing to work with the company during difficult times and allow Six Flags more time to recover from the impact of Covid-19. If the cases continue to rise resulting in re-imposition of lock downs, then the price is likely to drop again, as the revenue and earnings recovery will be delayed. But in the absence of further lockdowns, and with the economy gradually opening up, the stock is likely to hover around its current level of a little over $20.

Check how Six Flags Entertainment compares with rival SeaWorld Entertainment.

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