Six Flags Entertainment Corp (SIX -1.51%) is one of the largest theme park operators in the world, with 18 parks throughout North America. Since emerging from bankruptcy in 2010, the company has gotten its financial act together, producing a profit in both 2012 and 2013. In fact, since shares began trading in May 2010, the stock price has more than tripled.
Source: Massachusetts Office of Travel & Tourism via flickr
So, why are the company's insiders loading up on shares? Why do they see potential for gains in Six Flags? Let's take a look and see if we can't figure out just what insiders see in this theme park operator.
About Six Flags
Six Flags' theme parks were visited by over 26 million people last year, and produced more than $1.1 billion in revenue.
In the 1990's and early 2000's, the company expanded rapidly, and ended up accumulating an unmanageable $2.3 billion debt load in the process. Even after selling off a lot of assets, the company succumbed to the recession and was forced into Chapter 11 bankruptcy in 2009.
Since emerging from bankruptcy, the company has a lower debt load to deal with, as well as the financial flexibility to keep their parks fresh and competitive. The company has done a great job of increasing its revenue per customer as well as controlling expenses.
In fact, Six Flags' management is so confident in its operations that it pays an extremely competitive 5.5% dividend yield (which has been increased every year since emerging from bankruptcy) as well as instituting an aggressive share repurchase program.
Why insiders buy and sell shares
Insider buying and selling can give investors insight into how the company's directors feel about their own company. And, for reporting purposes, "insiders" refers to a company's officers, directors, and any owners of more than 10% of a company's securities.
Legally, all insider trades must be conducted based on publicly available information. For example, an executive cannot load up on shares because he/she knows the company is about to be taken over, but this has not been announced to the public yet.
There are plenty of reasons insiders decide to sell shares, and not all of them are negative. For example, maybe an insider has 90% of their total net worth tied up in a company's stock. Such an arrangement is never a good idea, no matter how bullish on the company you are, so gradually selling shares to diversify one's holdings is simply a good investment decision.
Or maybe the insider received their shares as a result of stock options or a bonus payment, and just wants to convert some of this compensation to cash. Or, maybe they just need the money. And on the negative side, maybe they really feel like there is something fundamentally wrong with the company. The point is that when it comes to selling, it's tough to determine the motivation behind it.
On the contrary, there is really only one reason insiders choose to buy shares of their company on the open market: because they believe that they will make money.
Insider buying has certainly picked up at Six Flags
Over the past three months, more than 1.2 million shares have been bought or acquired by insiders (including purchases and other forms of acquisition, like exercising options), with less than 300,000 sold.
And some of the insiders now have rather substantial holdings. CFO John Duffey owns more than 636,000 shares. And, company officer Lance Balk owns about 311,000 shares, which has increased by more than 5% in the past month alone.
CEO James Reid-Anderson owns an impressive stake of more than 4.4 million shares, which represents nearly 5% of the total outstanding shares, and he has increased his ownership by more than 20% since March.
Reasons to love Six Flags
It's tough to determine why the insiders are acquiring shares, since there are several potential reasons.
For example, maybe the directors really believe in the company's expansion plans. In June of this year, the company announced plans to expand into the Chinese market by building six new theme parks over the next decade.
Or, maybe they just feel that shares are cheap right now relative to their potential. Since June the share price has fallen by more than 21%.
And, while the TTM price-to-earnings multiple of 24.6 sounds expensive; consider that Six Flags is expected to deliver earnings growth of 22% this year, and nearly 50% by the end of 2016.
A good risk/reward ratio
Basically, the reason that insiders buy and hold shares of their own company is because they feel that the risk/reward ratio is favorable.
In the case of Six Flags, management clearly believes that the company has the potential to deliver on its growth ambitions and will continue to push revenue higher. And, management seems to be completely comfortable with the current financial state of the company, including the current debt level.
While it's not always a great idea to buy a stock simply because its insiders are, Six Flags definitely looks like it could have a bright future and management has certainly demonstrated its priority of returning capital to its shareholders.
