Why investors should stay away from SeaWorld, Six Flags, and Cedar Fair?

Why investors should stay away from SeaWorld, Six Flags, and Cedar Fair?

It is reported that SeaWorld plans to sell 20 million shares between $24 and $27 a piece. At the midpoint of $25.50 per share, shares would trade at 27 times trailing earnings. Competitors Six Flags (SIX - 12.1 times), Cedar Fair (FUN - 22.6 times), Carnival Corp. (CCL - 17.9 times), Walt Disney (DIS - 19 times) trade at lower multiples. (By Abram Brown @forbes.com.)

By multiples of free cash flow (FCF), a more popular measurement, the multiples are SIX (14.9 X), FUN (12.1 X), Carnival Corp. (39.8 X), and Walt Disney (29.8 X). Taking MorningStar evaluation as a starting point, the so called intrinsic value per share are: SIX ($ 66.37 at 5.5~5.6% 3-yr growth rate), FUN ($ 34.94 at 3.9~5.3% 3-yr growth rate), CCL ($ 41.00 at -2.6~4.6% 3-yr growth rate) and DIS ($ 60.00 at 3.4~5.4% 3-yr growth rate). Meanwhile, on March 14^th SIX had an intrinsic value of $58.73 and on April 4^th this value increased to $66.37. Stock valuation creates miracle.

Such a set of growth rate is much more than optimistic considering the current economy, unemployment, market and competition, especially for FUN and SIX. I do not see the reasons that SIX should grow faster than FUN, CCL, DIS. If other conditions do not change while SIX and FUN are comparable, assume FUN’s intrinsic value at 34.94 is reasonable, SIX’s intrinsic value should be no more than $55 per share.

Multiples	TTM Earning	Free Cash Flow	Market Price per share	Intrinsic Value per share	Growth Rate (3-Yr revenue)
SeaWorld ($$$)	24~27 X		$	$	%
Six Flags (SIX)	12.1 X	14.9 X	$ 73.20	$ 66.37	5.5~5.6 %
Cedar Fair (FUN)	22.6 X	12.1 X	$ 40.30	$ 34.94	3.9~5.3 %
Carnival (CCL)	17.9 X	39.8 X	$ 34.95	$ 41.00	(2.6)~4.6 %
DisneyWorld (DIS)	19.0 X	29.8 X	$ 60.55	$ 60.00	3.4~5.4 %

The multiples of SeaWorld is apparently too high and overvalued. But from my point of view, the whole industry is overvalued as well. Why SeaWorld IPO now? The top 2 reason should be seasonality and overvalued stocks of theme park industry. Memorial Day weekend (the final weekend of May) marks the traditional kickoff of summer theme park season, and virtually investors intend to bull such stocks before the “sell in May”. That is why SeaWorld is releasing price range at this moment to test water. All theme park stocks are overvalued at this moment and investors should expect a major correction in months. Reasons are coming up in the next paragraphs.

(1)    Market and competition

Where are the competitors? I put the locations of FUN, SIX, SeaWorld and DIS in one map so that readers can easily figure out what we are talking about. SeaWorld has 3 locations (as we can see from its website), and it compete with DIS in Orlando, with SIX in San Antonio, and with FUN in San Diego. Actually, they compete with each other at also everywhere in United States, especially for FUN and SIX, and it is difficult to build regional monopoly. Although SIX 10-K reports said that the parks “strategically” located in US, we hardly can see any clear strategy by location other than geographic demography. The promotion strategies are common for all the parks, such as seasonal pass, all-your-can-eat, etc. Keep this in mind, the customer groups for the theme parks should be relatively stable even these companies may prefer slightly different promotion and programs. As a common sense, if there is a park 15-mile away from your home people rarely travel 100 miles to another one just because that park has a roller coaster 10-feet higher than that of the park closer.

(2)    Cyclical industry? How comes the 5%+ growth rate?

Then, with the relatively stable customer group, how can theme parks get more money from their pockets? Is the disposable income increasing? Are they willing to spend more under such a slow economy? Where does the money come from to support the growth rate of 5%?

The following map will tell you why a growth rate of 5% sounds like a mission impossible. The increasing food stamp population will tell the truth – individual budget for entertainment is tighter than ever before. Investors would better forget the "conviction-buy" SIX of $83.50 per share by Goldman Sachs if they still remember Goldman Sachs’s famous forecast in mid-2008 that oil price would surge to $200 a barrel. By the way, I agree that Goldman Sachs has more power in manipulating stock price than anyone else.

The only reason that keeps the share price high is the involvement of institutes, funds and dominant insiders. How can small investors mitigate the risk? Stay away from SeaWorld, FUN and SIX stocks.

 

Conclusion:

SeaWorld IPO would be good for current stake holders to cash in, but bad for others to invest. You may say that this industry can create strong cash flow, but if the cash flow is really strong enough why IPO? We know the equity market is already red hot and index is at all-time high this week. We also know that the industry competition is fierce and hardly to say which one has clear advantage over others. Therefore, it does not matter how well Blackstone can market this event, the fundamental purpose is to pocket cash through IPO.

Why SIX FLAGS is not a reliable long-term investment?

Interestingly, Goldman Sachs started covering SIX FLAGS with a target price at $83.5. Each and every time comments from Goldman will remind me its famous estimation of oik price in early 2008. As nobody, I have no way to learn whether deals made under the table already before these estimation and forecast being released, but investors should at least keep in mind that Goldman Sachs involved in SIX FLAGS bankruptcy re-organization 3 years ago.

Why SIX FLAGS is not a reliable long-term investment?

(1)   the repurchase volume: (based on Yahoo Finance and latest 10K report)

From Jan 1 to Feb 19, in 33 trading days totally 15,755,800 shares traded. During the same period, SIX FLAGS repurchased 3,200,000 shares, or 20.31% of the trading volume. How this repurchase can impact the share price?

From March 1 to April 5, in 25 trading days the trading volume is merely 1.2% of floating and 0.75% of total outstanding shares (Yahoo Finance). How many of these shares were to be cancelled or just switched hand between institutes? We will see this soon once institutes report to SEC.

(2)   Misleading target price or intrinsic value? Top institutions pocket cash now.

The calculation of many target prices looks more like a number game rather than science. For example, some calculations start with current share price, and assume current price is reasonable. So, you may understand why SIX FLAGS target share price can reach $81, while the intrinsic value evaluated by MorningStar is hanging around $60. (But increased to $67 just yesterday, my analysis will be available shortly to tell why the estimated revenue growth rate is too high in this report). Before making decisions based on those free target price numbers, investors should do necessary homework and clearly understand the logic behind them, as well as the pros and cons of such logics.

Recent SEC reports show that some large institutes are selling SIX FLAGS and pocket cash. Always keep an eye on this because small investors are disadvantaged in term of information.

(3)   Growing company? Growth rate? (search for the definition of growing company and typical gimmick of decorating…)

Many companies want to label themselves as growing company, such as SIX FLAGS. Then, those professional will feel free to manipulate the growth rate. As regional theme parks have very focused customer groups (people rarely drive more than 80 miles to a theme park just because that park has a roaster that is 10 ft higher than another park at the door), even selling seasonal pass could not guarantee more visits. Keep in mind that in-park consumption has much higher cogs than that of admission. The local market should be largely fixed, needless to say the higher tax rate starting in 2013. Local community will have more disposable cash for entertainment in 2013? You should think it over carefully. The high growth rate? You’d better forget it. Please take a look at the profitability of Disney because everyone knows Disney is the market leader in this industry. I must admit that seasonal pass gives the management team more flexibility to manipulate quarterly revenue.

Common sense: If home is close to park, pass visitors do not need waste too much money in the park. If far from home,  # of visits for each pass-holder would be low.

What else should investors know?

(4)   insider trading volume

The insider trading is very active in Q4 of 2012 due to the coming change of capital gain tax. In 2013Q1, such trading volume is minimal.

(5)   track record

History repeats itself, but wise investors would not repeat mistakes. Buckle up if you do want to join the game, and cross your fingers.

STP finally bankrupt, and which PV solar maker can survive?

Suntech, once the PV solar industry leader, bankrupted finally. Very bad news to investors, especially small investors have less or no hedge. Good news to the industry? Not necessarily. LDK, JASO, YGE, and TSL are facing the same issues as well. If the industry could not stop burning cash effectively, bankruptcy would be the only destination.

Government policy can create the boom of industry when economy is healthy, and kill it when difficult. As no light can be seen at the end of the EU crisis tunnel, we can expect further and deeper subsidy-cut. Then, the biggest PV solar market will diminish. Accordingly, once prosperous PV solar makers will collapse one after the other. STP is just the beginning.

Six Flags Entertainment Corp (SIX) target price raised to $81.00 by B.Riley

Six Flags Entertainment Corp (SIX) target price raised to $81.00 by B.Riley

http://zolmax.com/stock-analysts-price-target-changes-for-march-22nd-cso-cxo-dre-etp-iag-mu-oge-qre-six-suss/51233/

This is ridiculous. Look at my comments>>>

Philipsays: March 22, 2013 at 8:16 pm
SIX FLAGS has a target price of $81.00? It sounds like that in May 2008 Goldman Sachs analysts’ forecast that oil would reach $200 within the next two years. God bless small investors.

Philipsays: March 23, 2013 at 2:01 am
Institutions are funny to publish so called target prices. Some calculation methodologies are highly subjective and even make no common sense. Sadly, many small investors trust such target prices just because they are published by institutes. Small investors should waste no time on such numbers if thy do not how calculated. Thinking independently would be more helpful.

SIX FLAGS Entertainment - stay away from its stock!

Stay away from SIX Flags Entertainment

A company survived from a bankruptcy 3 years ago witnessed the booming of its share price in the last 12 months. But, how far can it go?

Fundamentally, the operation cash flow is attractive and the EPS returned to reasonable range after releasing the latest full year report. Why a company that has strong cash flow turns out to be risky?

Here are the reasons. SIX Flag issued $800M senior notes in Dec. 2012 and the majority of this issuance was and will be used for share repurchase. Excluding this, the company spent tons of money on share repurchase already. Why risky? (1) A company continuously spent significant amount of capital on share repurchase is susceptible when the share price is at historic high. (2) The model of repurchasing with borrowed money to boost share price would not be sustainable as the leverage increases. (3)  The interest rate would stay low for the next couple of years? Correct, but intelligent investors would sell prior to the raise of interest rate. Can you foresee the time they start to sell? In 2012 Q4, Hass sold out all its SIX Flag shares already. Unfortunately, common investors can only learn this after it happened. And it is too late to response.

Interestingly, the facts behind are more interesting than what it looks like. A handful of senior executives of SIX Flags are receiving generous option, and vast majority of them sell the shares exercised immediately for cash. They are earning good money from the company but this would never be reflected to its cash flow statement. So, you know why they repurchase at high price and the intention to maintain a high share price. How far can it go? Do not know yet, but definitely would not be long. Do not forget, S&P just reached the 5-yr high.

Do not ignore the management team at anytime. The top management team have interesting track of records in driving companies bankrupt. If you look at the bios of them, the guys taking all the critical positions, you will find that they have great relationships, if not more than great. The team worked together to kill other companies and wipe off all investor equity. The only question to investors is that – will history repeat itself?

Disclosure: I short SIX but no position in the next 72 hours.

 

 

When DowJones reached all-time high again, what should common investors do?

As the market reached all-time high last week and media reiterates that the economy is speeding up, what should investor keep in mind?

First thing first, investors should focus on investment, not speculation. As the market is random walk, speculation would never get you rich.

Second of all, When everyone is saying market is great, that means successful investors are selling and walking away. Do not believe this, read through the story of Warren Buffet. 

Now, your personality counts. People are greedy, but we need keep in mind that only if you control yourself well you can reach your goal. And the goal should be consistent as well.

OK, with my blog, let us take a look at the interesting equity market. Please feel free to share your thoughts. Good Luck with your investment.