Why the Six Flags Sell-Off May be Overblown

After reporting quarterly earnings, Six Flags took a beating on Wall Street due to decreasing attendance. Here's why today's price cut does not matter for Six Flags in the long term.

Jul 28, 2014 at 3:00PM

When Grand Prairie, Texas-based Six Flags (NYSE:SIX) reported earnings for the second quarter of 2014, investors were not too pleased. Despite robust growth in revenue and earnings, investors sent Six Flags' stock plummeting nearly 8%. Let's examine the main assumptions Wall Street seems to hold about Six Flags' performance and why the price drop was ultimately unjustified.

Why did the stock drop?
Investors seem to be turning bearish on Six Flags primarily because attendance decreased at the company's parks. Park attendance decreased across the board by 8%, which left Wall Street worried that Six Flags would not be able to draw the crowds necessary to maintain competitiveness in the industry. 

Six Flags responded to the fears by mentioning how the fierce winter storms of late 2013 and early 2014 affected its bottom line. At first, when reading over the report one may be inclined to think, "Um, Six Flags, it's summer. Stop blaming events from half a year ago for poorer attendance rates."

But hold on, Six Flags has a legitimate reason to mention the weather. The bad winter took a chunk out of the amusement park company's second-quarter results because of shortened holiday breaks and extended school schedules. Obviously, if Johnny and Susie are still in school in late June because the winter storms wreaked chaos on school schedules, families won't be at Six Flags.

However, despite the small concern about the decrease in overall attendance, Six Flags posted robust record results in other areas, which is why the share price decline seems unjustified from a long-term perspective.

Great financial performance and future potential
What is puzzling about the Six Flags sell-off is how Wall Street overlooked the company's good performance despite challenging economic times. The situation is comparable to a teenager who cleans his entire room and makes it immaculate, but leaves a pair of dirty socks on the floor. When it comes to Six Flags, it seems that Wall Street is fixated on the socks, not the immaculately clean room. 

Six Flags announced a record financial performance for the second quarter of 2014 as revenue grew $13 million, or 4%, to $377 million. In-park per capita revenue increased $1.65, or 10%, to $18.58. Guest spending per capita increased $4.21, or 11%, to $43.73, and admissions revenue per capita increased $2.56, or 11%, to $25.15. Adjusted EBITDA for the same three-month period came in at $145 million for a $7 million, or 5%, increase. Six Flags thrives because it is comparatively less expensive than Disney. Clearly these numbers indicate that the company is growing and still performs well in comparison to its peers. (NYSE:DIS)

Six Flags is not only doing well financially, the company is also making smart moves into emerging markets. In April of 2014, Six Flags announced a new venture into the Middle East with the construction of a new theme park in Dubai, United Arab Emirates. And during the second quarter of 2014, Six Flags announced a new strategic partnership to build multiple Six Flags-branded theme parks in China. By tapping into emerging markets, Six Flags' management is making wise decisions for the company's future growth.

Another compelling reason to consider investing in Six Flags is the corporation's annual dividend payout of $1.88, which is currently yielding 4.5%. For income-oriented investors who are looking for a dividend stock, Six Flags is worthy of your attention.

With a great dividend, good expansion opportunities, and a recovery from winter storms under way, Six Flags is in a good position. The Six Flags sell-off at first seems justified, but ultimately the sell-off was short-sighted considering Six Flags' long-term potential.

Evan Buck owns shares of Six Flags, while The Motley Fool has no position in the company. If you enjoy reading Evan's stock analysis, follow him on Twitter @EvanNBuck. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

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