Is Six Flags a Buy After Earnings?

Though very expensive, cyclical businesses to run, theme parks enjoyed a period of growth in the wake of the financial crisis as families looked to less-expensive vacations. The trend stuck, and a few of the publicly traded players have fared extraordinarily well. Even Comcast-owned Universal's theme parks, once a troubled spot for the conglomerate, are showing up on the company's financials as one of the brightest spots. A pure play on the business, Six Flags (NYSE: SIX  ) , has seen similar fortunes -- along with its investors. Since mid-2010, the stock is up more than 300%. The company just issued earnings that missed analyst expectations, but it couldn't stop the market from rallying the stock yet again. Is Six Flags bound to keep tracking up?

Below estimates, but above water
With the stock up nearly 7% on the day of the release, Six Flags earnings were actually underneath analyst estimates for the three-month period, though with strong numbers in guest spending per capita and total traffic. Earnings on the whole were limited due to a tragic event at the Dallas location, where a woman fell out of a roller coaster to her death. Besides the legal expenses associated with the accident, the company saw guest counts decline at the location.

The terrible event aside, Six Flags still performed impressively and achieved record revenues of $505 million -- a 4% gain over the prior year's number. On a comparable sales basis, Six Flag's EBITDA grew by 4% in the quarter, and is up 8% so far this year. By 2015, the company is looking to hit $500 million in "modified" EBITDA, or $3 in cash per share.

Six Flags currently has $1.2 billion in net debt (long-term debt minus cash) and nearly $201 million in cash.

A ride worth taking?
The company is doing a great job at generating cash, and is using its free cash flow to both invest in new parks (more favorable) and employ traditional shareholder-friendly tactics such as buybacks and dividends (less favorable). A theme park's success over time is heavily reliant on the investment back into the parks -- renovating the spaces, new rides, etc. So far, management is doing a great job, with the parks showing record guest satisfaction rates, even with the fatality earlier in the year.

One issue with the stock, though, is valuation. With a stock price at nearly 25 times forward earnings, more than three times sales, and an EV/EBTIDA of more than 11 times, the market has this company pegged for big growth. Even though theme parks have had a great run over the past few years, things could change down the road -- and the stock's pricing doesn't give it much room for bad news. If the economic recovery continues as planned, people may again return to more luxurious vacations instead of a day at the roller coasters. If that's the case, it may be tough for Six Flags to pull levers for the expected growth.

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