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Why Six Flags Entertainment Stock Opened 11% Higher on Thursday

What happened

Shares of regional amusement park operator Six Flags Entertainment (NYSE: SIX) jumped as much as 11% in the first half-hour of trading today. The gains were likely precipitated by a company news release on Wednesday, which was revised and updated today before the market opened. Investors clearly viewed the update as a positive event, but there's a negative here that can't be overlooked.

So what

The big news is that Six Flags' lenders have granted it additional leeway, showing that they are still willing to work with the company through what is a very difficult time. Economic shutdowns and social distancing related to COVID-19 have had a particularly heavy impact on the amusement park company. As such, lenders have extended a key leverage covenant waiver by a year to the fourth quarter of 2021, with an additional covenant modification extended out to 2022. The important takeaway is that these moves allow Six Flags more time to recover from the impact of COVID-19.

Image source: Getty Images

Without question this is good news for Six Flags. But investors need to juxtapose that against the still-uncertain long-term impact of the pandemic. Amusement parks are built to bring large numbers of people into a group setting where they end up close together on rides, a situation in which the coronavirus could easily spread.

In other words, Six Flags' business model could remain under pressure until the world has a better handle on COVID-19. Higher operating costs and reduced attendance are two very notable headwinds. So it is a good thing that the company's lenders are working with it, but it is still a very bad thing that it needs this help in the first place.

Now what

Long-term investors would probably be better off avoiding the uncertainty surrounding Six Flags today. In fact, even with the covenant changes, it remains a heavily indebted company operating in a very challenging environment. The only thing that is pretty certain right now is that volatility here will likely remain elevated.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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