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.