Shares of amusement park operator Six Flags (NYSE:SIX) closed down 11.8% in Thursday trading after getting hit by an "initiation at sell" recommendation from investment heavyweight Goldman Sachs.
Six Flags stock closed above $27 in Wednesday trading, but Goldman Sachs says the stock is only worth $22. After declining in price more than $3 Thursday, the stock is already more than halfway to Goldman's target.
But why did Goldman downgrade in the first place? As StreetInsider.com reports today, Six Flags' business was already trending downwards before COVID-19 struck the planet. Now, as the company attempts to emerge from the coronavirus recession and get its business back up and running, the analyst warns that "planned investments/overhaul in guest experience" will delay the company's recovery even longer and contribute to further market-share loss to the company's rivals.
On top of all that, Goldman thinks Six Flags' stock valuation is "elevated" -- although elevated relative to what is not clear. Rival Cedar Fair sells for just a bit over 12 times forward earnings, which is right in line with Six Flags' forward P/E. Walt Disney stock, meanwhile, costs more than 62 times forward earnings!
Goldman Sachs is certainly right that Six Flags' business was declining before coronavirus came on the scene, with generally accepted accounting principles (GAAP) net profit down about 35% from 2018 to 2019. That being said, free cash flow at the company was robust in both years and has largely remained so over the past 12 months, running nearly 50% ahead of reported profits, at $242 million generated in the past year.
While I can't bring myself to get excited about any business built on the idea of bringing large groups of people into close proximity, in the near future, if coronavirus ever goes away, and if Six Flags gets a chance to get back to growing in a COVD-19-free world, I honestly don't see why Goldman Sachs would dislike this amusement park stock any more than any others.