Dividend Raised, Insider Purchase, But Don’t Buy

Six Flags Entertainment Corp (NYSE:SIX) reported its results for the crucial third quarter of the year in late October. Revenue was 2% higher for the quarter than in the summer of 2011, driven by the company receiving more money from admissions. Expenses were generally unchanged, and so when a $67 million gain on sale is stripped from the results Six Flags’ operating income was up 4%. However, the market had been hoping for better results, particularly in terms of revenue, and so the stock price dived on the day. The stock is still up 37% year to date, and 57% over the last year. In the quarterly report, Six Flags revealed that the company had also decided to increase its quarterly dividend to 90 cents per share. At the current price of about $56.50 per share, that gives an annual dividend yield of 6.4%. This makes it a good stock to watch for income investors.

Kyle Bass

The news was quickly followed by Board member Richard Roedel purchasing just over 2,700 shares of the company’s stock at an average price of $55.03 per share for his defined benefit pension plan (Roedel also owns about 13,000 shares directly). Insider purchases are important to note because they tend to be associated with positive returns for the stock (learn more about studies on insider trading).

Kyle Bass’s Hayman Advisors didn’t report many long equity positions in its 13F portfolio for the second quarter of the year compared to its reported assets under management, but Six Flags Entertainment Corp was the top stock on the fund’s filing. Hayman owned about 570,000 shares at the end of June (research more of Kyle Bass’s favorite stocks). Rehan Jaffer, the activist manager of H Partners Management who previously worked at Dan Loeb’s Third Point, also liked Six Flags. It was the top holding in H Partners’ 13F portfolio as well, with the fund reporting a position of 12.8 million shares (see more stocks that H Partners owns).

Six Flags Entertainment Corp may look good to these players, but the stock trades at a rather high forward P/E multiple of 28, suggesting that the sell-side is less convinced that the company is worth the current price. 11% of the shares outstanding are held short, so many traders are bearish as well and our view is also that Six Flags is overvalued.

Six Flags’ closest peer is amusement park operator Cedar Fair, L.P. (NYSE:FUN). It can also be compared to The Walt Disney Company (NYSE:DIS) and, to a lesser extent, cruise lines Carnival Corporation (NYSE:CCL) and Royal Caribbean Cruises Ltd. (NYSE:RCL). Cedar Fair trades at a considerable discount to Six Flags, at only 14 times consensus earnings for 2013, and in fact at only 16 times trailing earnings as well. Its current dividend yield of 4.5% is also very attractive, though the company’s dividend payments have fluctuated quite a bit in the last few years. We think that it’s a much better value. Disney is priced about even with Cedar Fair on both a trailing and forward basis, even though it operates many businesses which offer better opportunities than theme parks (such as its television assets) and its theme parks offer a much more powerful brand. Its dividend payments aren’t as great, but with the company’s revenue and earnings up last quarter versus a year earlier we’d consider it an even more attractive stock than Cedar Fair. The cruise lines both reported lower earnings in their most recent quarter compared to the same period in 2011 (though Carnival’s was a very small decline), with revenue lower as well. We also don’t think that this is even as good a business to be in as theme parks, due to the many problems that cruise ships have encountered in the past few years. With forward P/Es in the 13-15 range, and therefore priced even with Disney and Cedar Fair, we would avoid these stocks.

We don’t think that Six Flags is a good stock to buy, even considering the insider purchase. Investors who like the theme park business- unless they also have a very strong preference for a high dividend yield- would be better served by buying Cedar Fair or Disney.

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