If we look at the stock price of SeaWorld Entertainment, Inc. (NYSE: MERS) in the last five years, we can see an impressive increase of 311.78%. In 2013, the future did not look so bright after the The release of the Blackfish documentary and the negative publicity surrounding animal care at SeaWorld parks dramatically reduced visitation.
However, since 2017, activist investor and current chairman of the board, Scott Ross, was a catalyst for significant change; new management members, cost reduction, massive investments in park upgrades, big data analytics, advocacy to shift to more thrill-focused entertainment offerings, fewer live animals and making shareholder value a priority. Nonetheless, SEAS has yet to track pre-COVID-19 international visitor numbers and organized group attendance levels. The investments are bearing fruit if we consider the revenues of the first and second quarters of this year. Although attendance was well below 2019, revenue has increased by increasing per capita spending in the park. The company showed resilience during previous economic recessions in 2001 and 2008 and overhauled its brand image at a critical time.
While investors should beware of SEAS’ high long-term debt and immense cost escalation over the past quarter, I think investors may want to take an optimistic stance on this company with solid fundamentals and higher growth potential once fully operational.
SEAS has a portfolio of twelve parks. The first park opened in 1964 in San Diego. Most customers, on average 85%drive in parks.
The company has undergone a much-needed rebrand, moving from a park with animal entertainment to one that promotes animal welfare. Review of second quarter results with management team included number of animals helped, 350 for second quarter 2022. Change also included cost reduction, investment of more than $785 million in rides , animal areas and general park improvements, plus a mobile app.
The mobile app has been downloaded 2.9 million times. The company sees a 10% increase in food and beverage purchases compared to direct sales. About one in five fleet users engage through the mobile app. Although the company has not confirmed any fixed plans, SEAS is in the early stages of finding potential sites to develop hotels that would complement the parks.
COVID-19 is still impacting the number of international and organized group visitors. The company has yet to reach its 2008 attendance figures of 25 million people, or 3 million more than today, minus one park.
Finances and evaluation
The company shared strong results in the second quarter, and both revenue and earnings performance improved from the prior quarter. Revenue was in line with expectations at $504.8 million, a year-on-year increase of 14.8%. It beat EPS for another straight quarter by $0.09 to $1.62. Although better than last quarter, net income was lower than Q2 2022 at $116.6 million, a reduction of 8.7%. This is explained by a cost increase of 21.1%. Attendance increased by 0.5 million guests year-on-year to 6.3 million. Attendance is lower than in 2019 because international customers have not yet returned to their usual attendance. Adjusted EBITDA reached a record high of $234.4 million, an increase of 7.1% year-on-year.
The company has managed to increase per capita spending in the park. There has been a 32.8% increase since 2019. The company has strategically worked on its pricing, improving its product quality and mix. There are new and improved locations, events and more offerings in the park.
Financially, the company is in a strong position to invest in new opportunities and return capital to its shareholders. It has a positive cash flow of $162.9 million. Its indebtedness is below a ratio of 2.7 and available liquid assets amount to $531.1 million, including $160.8 million in cash and cash equivalents and $370.3 million on credit. During the last quarter, it repurchased 7.1 million common shares at a value of $390.1 million. SEAS repurchased 1.5 million shares in the first quarter and has just approved a $250 million share buyback program. It spent $21.4 million this quarter on expansion and capital projects.
We can be confident in the company’s past performance during periods of recession. It outperformed amusement park industry trends in 2008 and 2002, as shown in the chart below.
This week, Deutsche Bank gave SEAS a Buy recommendation. Various Wall Street analysts also recommend the stock as Buy at 4.3. The reason for this is the belief that consumers will continue to spend on outdoor recreation for the remainder of the year, and SeaWorld parks have the capacity and seasonal attractions to attract more consumers, such as upcoming Halloween events. very popular. If we compare SEAS to its theme park alternatives, Cedar Fair LP (FUN) and Six Flags Entertainment Corporation (SIX), the 12-month price-to-earnings ratio is well below 14.57 compared to its peers. This indicates that the stock may be undervalued. It also has a one-year price target estimate of $72.80 on Yahoo Finance, showing much more upside potential.
The business must become more efficient given the impact of inflation, excessively high salaries and operating expenses. During the last quarter, costs increased by 21.1% to $33.2 million. Inflation has affected operating costs, especially labor and operating costs, as well as chemicals needed for maintenance. The business is subject to a cyclical supply chain and temporary expenses such as energy and utilities, shipping, food, wages and employee related costs. The company believes much of the spending this quarter is fast and unusual and has talked about better strategies to manage pricing, including a better mix of fixed and part-time staff.
Another risk is SEAS’ high long-term debt of $2.1 billion. The table below shows that it is better placed than its direct peers. Nevertheless, as an investor, it is essential to know that the liabilities of the company are more important than its assets. Long-term debt to total capital is very high at 121.07%. This can become a problem if the business cannot generate enough cash to repay interest and creditors. Looking at SIX and FUN we can see a similar trend in the industry which may be related to the nature of the business.
SeaWorld has invested heavily in its twelve parks to increase the quality and number of offerings, and management estimates that 2-3 million additional visitors per year is a realistic possibility. Although attendance was down from 2019, revenue increased significantly with better price and quality offerings in the park, in addition to more and improved offerings. The parks have the capacity to accommodate 30 million people, 8 million more than today. SEAS international attendance is still below 50% of pre-COVID-19. Additionally, group attendance is expected to improve with school outings, church groups, and other company events. In addition to this, the ever-popular Halloween events attract many visitors. So, there’s a lot more upside potential for this strong stock, and that’s why I think investors may want to take a bullish stance on this company.