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Wednesday, April 24, 2024

Are Investors Undervaluing Six Flags Entertainment, Inc. (NYSE:SIX) by 24%?


key insights

  • Six Flags Entertainment has an estimated fair value of $32.28 based on Phase 2 equity free cash flow
  • The current share price of $24.58 suggests that Six Flags Entertainment may be 24% undervalued
  • SIX analysts have a price target of $33.14 2.7% higher than our estimate of fair value

How far is it from Six Flags Entertainment (NYSE: 6) from its intrinsic value? Using the latest financial data, we’ll take expected future cash flows and discount them to today’s value to see if the stock is reasonably priced. To do this, we will utilize a discounted cash flow (DCF) model. Don’t be fooled by the jargon, the math behind it is actually pretty simple.

We generally think of a company as being worth the present value of all the cash it will generate in the future. However, discounted cash flow is only one valuation metric among many, and it is not without its flaws.If you want to know more about discounted cash flow, you can read the rationale behind this calculation in detail Simple Wall Street Analysis Model.

Check out our latest analysis for Six Flags Entertainment

What is the projected valuation?

We use what is called a two-stage model, which means that our company’s cash flow has two different growth rates. Generally, the first stage is the higher growth stage and the second stage is the lower growth stage. First, we need to estimate cash flows for the next ten years. Where possible, we use analysts’ estimates, but when these are not available, we extrapolate prior free cash flow (FCF) based on the last estimate or reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction over this period, while companies with increasing free cash flow will see their growth rate slow. We do this to reflect that growth in earlier years tends to slow down more than in later years.

In general, we assume that a dollar today is worth more than a dollar in the future, so we need to discount the sum of these future cash flows to obtain a present value estimate:

10-Year Free Cash Flow (FCF) Forecast

Leveraged free cash flow (USD, million) $258.9 million$272.8 million$284.8 million$295.4 million$304.9 million$313.7 million$322.1 million$330.1 million$338 million$345.7 million
Sources of Growth Rate EstimatesAnalyst x5Yes @5.38%Yes @4.40%for @3.71%is @3.23%for @2.90%for @2.66%is @2.49%is @2.38%is @2.30%
Current Value (USD, Million) Discount @ 13% $230$215$200$184$169$155$141$128$117$106

(“Est” = Simple Wall St estimated FCF growth rate)
10-Year Present Value of Cash Flows (PVCF) = $1.6

The second stage is also known as terminal value, which is the cash flow of the business after the first stage. For a number of reasons, very conservative growth rates are used that cannot exceed a country’s GDP growth rate. In this case, we use the 5-year average of the 10-year government bond yield (2.1%) to estimate future growth. As with the 10-year “growth” period, we discount future cash flows to current values ​​using a 13% cost of equity.

Terminal Value (TV)= free cash flow2033 × (1 + g) ÷ (r – g) = US$346m× (1 + 2.1%) ÷ (13%– 2.1%) = US$3.4b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= $3.4 b÷ ( 1 + 13%)10= $1.0

The total value or equity value is simply the sum of the present value of the future cash flows, in this case US$2.7b. In the final step, we divide the equity value by the number of shares outstanding. The company appears to be undervalued relative to its current share price of $24.6, trading at a 24% discount to its current share price. But remember, this is only an approximate estimate, and like any complex formula – garbage in, garbage out.

NYSE: 40% Cash Flow July 10, 2023

important assumptions

We would like to point out that the most important inputs to discounting cash flows are the discount rate and of course the actual cash flows. Part of investing is making your own assessment of a company’s future performance, so try the calculations yourself and check your own assumptions. The DCF also does not take into account the likely cyclicality of the industry, or the future capital requirements of the company, so it does not fully reflect the company’s potential performance. Given that we view Six Flags Entertainment as a potential shareholder, the cost of equity is used as a discount rate rather than accounting for the cost of capital (or weighted average cost of capital, WACC) for debt. In this calculation, we used 13%, which is based on a leveraged beta of 1.753. Beta is a measure of a stock’s volatility relative to the overall market. Our betas are derived from the industry average betas of globally comparable companies, limited between 0.8 and 2.0, which is a reasonable range for a stable business.

Six Flags Entertainment Inc SWOT Analysis


  • The main advantage of number six was not identified.

  • Earnings have declined over the past year.
  • Debt interest payments are not well secured.

  • Annual revenue growth is expected to be faster than that of the US market.
  • Good value based on P/E and estimated fair value.
  • There has been significant insider buying in the past 3 months.

  • Operating cash flow does not cover debt well.
  • Total liabilities exceed total assets, which increases the risk of financial distress.
  • Annual revenue growth is expected to be slower than the US market.

Looking to the future:

While the DCF calculation is important, it’s only one of many factors you need to evaluate your company. The DCF model is not the entire and ultimate purpose of investment valuation. Instead, it should be viewed as a guide to “what assumptions are needed to make this stock undervalued/overvalued?” If a firm grows at a different rate, or if its cost of equity or risk-free rate changes dramatically, the output can be very different. Can we figure out why the company is trading below intrinsic value? For Six Flags Entertainment, we’ve put together three relevant elements you should focus on:

  1. risk: Every company has them, we’ve found 2 warning signs for Six Flags Entertainment You should know.
  2. manage: Have insiders been taking advantage of the market’s perception of SIX’s future prospects to increase their holdings?look at our Management and Board Analysis Insights into CEO compensation and governance factors.
  3. Other stable business: Low debt, high return on equity and strong track record are the foundation of a strong business.why not explore Our interactive list of stocks with solid business fundamentals See if there are other companies you may not have considered!

postscript. Simply Wall St updates the DCF calculations for every US stock on a daily basis, so if you want to find the intrinsic value of any other stock, just search here.

Valuation is complicated, but we’re helping make it simple.

Find out if Six Flags Entertainment is potentially overvalued or undervalued by viewing our comprehensive analysis, which includes Fair value estimates, risks and caveats, dividends, insider trading and financial health.

View free analysis

This Simply Wall St article is general in nature. We use an unbiased approach only to provide reviews based on historical data and analyst forecasts, and our articles are not intended to provide financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or your financial situation. Our goal is to provide you with long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St does not hold a position in any of the aforementioned stocks.


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