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Michael Fowlkes' Analyst Insights

Options and ETF Analyst Writer
Michael Fowlkes
Author Bio

February 19, 2013 - Six Flags Much Stronger After Bankruptcy

Since coming out of its recent restructuring, Six Flags (SIX) has been a much stronger company than the one that was forced into bankruptcy back in 2009. The company was able to lower its debt from $2.7 billion to $1 billion, which has allowed it to focus on growing its brand and improving the overall park experience.

Six Flags was hit hard during the recent recession, but with the overall economy improving, business has been good over the past year. In October, the company reported mixed results for its third quarter, missing its revenue forecast but crushing its earnings forecast.

What was most disappointing about the revenue miss was that it occurred during the summer months, which is the most important season for theme parks. Investors were quick to show their disappointment, sending shares of the stock down 10% on the day of the report, but the stock has since made back all that loss, and then some. As of the time of this article, the stock is trading at $65.39, just shy of its 52-week high of $65.50.

One reason why investors have been so interested in the stock is its dividend yield. The company raised its dividend from $0.06 to $0.60 last February, and then increased it another 50% in November to $0.90. Its annual yield is currently 5.5%.

We like the stock and believe the current economic landscape creates the perfect recipe for higher park traffic in 2013. The overall economy is gradually improving, so people are more willing to spend money on theme parks, but there is still just enough uncertainty that many choose to visit local theme parks instead of taking big trips to places such as Disney (DIS) World.

Six Flags operates 19 different theme parks, 17 of which are in the U.S., with one in Mexico and another in Canada. Due to its large number of parks, it is able to attract visitors from every corner of the nation, which gives it a strong advantage over its competitors.

We can get a little insight into what to expect from Six Flags by taking a look at Disney's recent earnings report. Disney reported earnings on February 5, and we saw encouraging numbers from its theme parks. The company reported that attendance at its various theme parks was up, with revenues from its parks and resorts jumping 7% during its most recent quarter.

If attendance was higher at Disney parks, we can reasonably assume the same for Six Flags over the same time period.

We will find out just how well Six Flags theme parks have been performing on February 20, when the company reports its fourth quarter results. Analysts expect the company to report a loss of $0.50 per share for its most recent quarter, versus a loss of $1.85 during the same period last year.

If you want to make a play on the stock headed into its fourth quarter earnings report, consider the June 50/55 bull put spread for a credit of $0.70. This trade has a target return of 16%, which is 45% on an annualized basis (for comparison purposes only). The best part of this trade is that it has built in downside protection of 15.5%, just in case we see disappointing results that send the stock lower.

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