Has Six Flags Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Six Flags (NYSE: SIX  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Six Flags.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 1.3% Fail
  1-Year Revenue Growth > 12% 3.9% Fail
Margins Gross Margin > 35% 53.2% Pass
  Net Margin > 15% 1.1% Fail
Balance Sheet Debt to Equity < 50% 88.8% Fail
  Current Ratio > 1.3 0.76 Fail
Opportunities Return on Equity > 15% 4.1% Fail
Valuation Normalized P/E < 20 43.75 Fail
Dividends Current Yield > 2% 5.0% Pass
  5-Year Dividend Growth > 10% NM NM
       
  Total Score   2 out of 9

Source: S&P Capital IQ. NM = not meaningful; Six Flags paid its first post-bankruptcy dividend in December 2010. Total score = number of passes.

Since we looked at Six Flags last year, the company has lost a point. But although its net margin has settled back down to more realistic levels, the company has become profitable and announced a big boost to its dividend recently.

Amusement parks suffered badly during the recession. Cedar Fair (NYSE: FUN  ) saw its revenue drop 8% from 2008 to 2009, and Six Flags actually ended up declaring bankruptcy (from which it emerged two years ago).

Since then, though, Six Flags has a new lease on life. With an important restructuring of its debt to take advantage of lower interest rates, the company not only cut its debt load but will also make it easier to finance debt going forward. That will be increasingly vital as Cedar Fair takes steps to improve its technology to compete better against larger operators Disney (NYSE: DIS  ) and Comcast's (Nasdaq: CMCSA  ) Universal Studios.

Moreover, interest in the sector has picked up lately. Just last week, Apollo Global Management (NYSE: APO  ) closed on its $740 million buyout of water park operator Great Wolf Resorts.

Unfortunately, Six Flags appeared to take a step backward when it announced earnings late last month. The company narrowed its year-ago loss but missed earnings estimates badly. After a tenfold increase in Six Flags' dividend earlier this year, that wasn't the news investors wanted to hear.

For Six Flags to get back to moving in the right direction, it needs to cash in on early warm weather and a steadily improving economy. Unless it can do that while continuing to boost its internal financials, then the stock's hefty valuation might not last very long.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Six Flags isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Six Flags to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Disney. Motley Fool newsletter services have recommended buying shares of Disney. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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