Why Six Flags Stock Jumped 30% Last Month

The company’s merger with Cedar Fair is now complete, and some believe the stock is undervalued.

Shares of amusement park company Six Flags Entertainment (SIX) jumped 30.2% in June, according to data from S&P Global Market Intelligence. However, as of July 1, Six Flags completed its merger with Cedar Fair Entertainment (FUN) and now trades under Cedar Fair’s ticker symbol. Shares of Cedar Fair stock were up 25% during the month.

Shares of both companies zipped higher last month as it became increasingly clear that the merger deal would go through. Not all merger proposals come to fruition, and Six Flags proposed a merger with Cedar Fair back in November. But on June 18, management released details for the merger, which regulators approved on June 26.

In relation to the merger, Cedar Fair CEO Richard Zimmerman is now CEO of Six Flags. For his part, former Six Flags CEO Salim Bassoul is now executive chairman of the board of directors.

Why are investors celebrating?

On June 12, B. Riley Securities analyst Eric Wold upgraded Six Flags stock, believing that shares were undervalued in light of its merger with Cedar Fair, according to StreetInsider. To his point, the combined companies own 42 theme parks and nine resorts. These have fixed costs, and the merger won’t necessarily change anything in this regard. But there are certain cost savings to be found elsewhere, which could make the company more profitable for investors.

By merging with Cedar Fair, Six Flags believes it can save $200 million annually within the next three years. For perspective, that’s more than the combined net income of these two companies before the merger.

SIX Net Income (TTM) Chart

SIX Net Income (TTM) data by YCharts

Investors may have also been excited about the special dividend from Six Flags. Anyone who held from June 28 through the merger completion on July 1 got a special dividend of $1.53 per share. At the time, Six Flags stock traded at around $30 per share, which translates to an attractive 5% yield. Some investors may have been motivated to buy shares before the merger to secure that payout.

What now for investors?

Virtually every merger or acquisition in the history of the stock market comes with management waving the banner for future cost savings and synergies. They don’t always materialize. Therefore, take the goal of $200 million in savings from Six Flags’ management with a grain of salt. It’s an area to watch.

Another area to watch from here is the profit margin for Six Flags. This could be a more important area to monitor than park attendance. In recent years, the company has pursued a strategy to become a premium brand with premium pricing. The idea is that fewer people will be in the parks, leading to shorter lines and happier park attendees. And by raising prices, the company hopes to have a higher profit.

Six Flags has made reasonable progress in its premium brand strategy. But it will be interesting to see how this develops now that it has merged with Cedar Fair.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cedar Fair. The Motley Fool recommends Six Flags Entertainment. The Motley Fool has a disclosure policy.

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