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Bear Of The Day: Six Flags (SIX)

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The anticipated second pandemic wave is finally hitting the world, and it has investors reeling from the most exposed segments like travel and leisure. Six Flags (SIX - Free Report) is one such sector that has investors/traders worried, and rightfully so. This stock is down over 55% so far this year, and it looks like it could be on the brink of capitulation if it's forced to repress operations once again.

Six Flags had finally started seeing more patrons at its limit parks (9 out of 26 open, but this may all be reversed by the fall uptick in COVID-cases. Analysts have been getting anxious about where this stock is headed even before its horrendous earnings yesterday morning, pushing down their estimates on concerns of another economic cessation. SIX is currently sitting at a Zacks Rank #5 (Strong Sell).

Q3 Earnings Results

Six Flags somehow missed on already hampered expectations taking the stock down 7.5% yesterday. This amusement park giant was able to attain 2.6 million guests (19% of what they had in the same quarter last year), with 9 out of 26 parks open today.

Revenues were down 80% from the prior year, and the company managed to lose $116 million on the bottom-line this past quarter and has monthly cash outflows of $27 million per month.

The company still has $673 million in liquidity, but what happens if attendance drops to 0 again? What happens if this "new normal" avoids theme parks even after COVID-19 is done and gone?

Bankruptcy Déjà Vu

Six Flags was forced to file for chapter 11 bankruptcy in 2009 because of its excessive leverage going into the financial crisis. The parks weren't able to sustain demand, and cash-flows were unable to match debt obligations. The company was handed over to bondholders who recapitalized the company and brought them out of the ashes.

Today the theme park giant has amassed almost as much debt as its pre-bankruptcy levels. Six Flags is operating quarter to quarter, just hoping that they will have enough income to cover the massive interest expense, which made up 63% of last year's interest expense. This unending pandemic might be the catalyst for a second bankruptcy, and this time it could be a complete liquidation of assets (chapter 7 bankruptcy).

If the company was forced to hinder operations at its remaining 9 parks, it could double the monthly cash outflows. The company wouldn't last more than 3 quarters before looking towards bankruptcy court at a burn rate this high.

Of course, this is a worst-case scenario. Regardless I wouldn't touch these toxic shares with a 10-foot pole. This company has been teetering the line of profitability long before this pandemic. I do not want to be apart of this declining industry as society develops a "new normal."

The Charts

SIX has been trending down since June of 2018, having lost over 70% of its value since then. SIX's chart below is a very unattractive sight for any technical trader, with its 50-day moving average (blue line) remaining below its 200-day (red line) for over a year.

Final Thoughts

Many 'value analysts' out there will convince you that this is an excellent buy at this ultra-low valuation. Don't get caught in this value trap. Six Flags is operating in a declining business, and unfortunately, the global pandemic only accelerated its obsolescence.

The stock may experience some upside if this second wave doesn't shutdown travel & leisure operations again, but I don't believe the risk you would be taking is worth the reward. I don't think the long-term value in the stock is worth the risk you'd be taking.

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