For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. congressional districts and its representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.
What SeaWorld Entertainment does
SeaWorld Entertainment owns and operates 10 theme parks throughout the U.S., of which three are marine-life themed, and the remainder are made up of water parks and themed hybrid parks consisting of water slides and roller coasters. It operates under the SeaWorld, Busch Gardens, Aquatica, Adventure Island, and Water Country USA brands, and was recently spun off by the Blackstone Group (NYSE: BX ) earlier this year.
In the first quarter, SeaWorld delivered a 12% increase in revenue to $238.6 million, which was driven by a 12% boost in admission per capita, and a 2% boost in overall traffic. In-park per capita spending increased by a more modest 6% as it expanded its product offerings and raised prices. SeaWorld's management also noted a definitive benefit this year from an earlier Easter. Total free cash flow also improved by $57 million over the previous year as it generated $32.3 million more in operating cash flow and reduced operating expense by $24.7 million. Overall, though, the company reported a $40.4 million quarterly loss, primarily tied to one-time expenses related to its break from Blackstone.
Whom it competes against
There are really two big concerns for SeaWorld -- other theme parks and the state of the U.S. economy.
There certainly isn't any shortage of competition for consumers' attention when it comes to theme parks -- and absolutely no love lost, either! Stacking up against SeaWorld in some form or another is Disney's (NYSE: DIS ) Disneyland and Disneyworld, Cedar Fair's (NYSE: FUN ) more than a dozen amusement parks and theme parks throughout the U.S. and Canada, and Six Flags Entertainment's (NYSE: SIX ) 18 themed amusement parks, of which 16 are located in the United States. Each offers something unique from an investing perspective that SeaWorld just does not.
For Disney it's the multi-channel branding. Disney's branding comes from its movies and TV shows, channels into its retail outlets, and transfers into actionable motivation that drives consumers to its theme parks. I'd go on the record stating that there is no theme park tied more to Americana, or that successfully attracts children, than Disneyland or Disneyworld.
In Cedar Fair's case, it doesn't have hugely differentiable factors that might separate it from SeaWorld's Shamu branding for instance, but it is a master-limited partnership, and, as such, pays out a whopping dividend yield that's approaching 6%, compared with SeaWorld, which pays out just a hair more than 2%.
Six Flags, on the other hand, speaks to the roller coaster enthusiast. With Sea World's parks being more water-oriented, Magic Mountain and its other theme parks often target younger thrill seekers. It also does its best to associate its rides with actionable and relatable movies, similar to Disney. Recently, a tragedy struck the Six Flags' theme park in Texas, with a woman falling out of one of its roller coasters and dying. While certainly creating bad publicity for Six Flags that could result in a sizable wrongful-death settlement, accidents like this have happened before, are extremely rare, and tend not to affect the long-term thesis of any theme park regardless of whether you're optimistic or pessimistic on the company.
The other big concern for theme parks is the health of the U.S. economy. It won't matter what sort of strategies these theme parks implement if consumers aren't spending or, in the case of some outdoor parks, if the weather doesn't cooperate.
After carefully reviewing the prospects for SeaWorld Entertainment, I've decided to place a CAPScall of underperform on the company.
Despite improved results in the first quarter, there are a number of factors that dissuade me from liking SeaWorld as an investment.
For starters, SeaWorld is sitting on a mound of debt-$1.85 billion as of its latest quarter – with just $59.4 million in cash . According to SeaWorld's S-1 filing prior to its trading debut, it notes that last year it spent $111.4 million just on interest payments for its debt. It did recently complete a refinancing on the bulk of its debt ($1.4 billion) that pushed the maturity dates back a few years to 2020 , but that still doesn't solve the problem of how its kicks nearly $1.8 billion in net debt under the rug when it's having trouble generating any sizable cash flow.
That leads me to my second point -- top-line growth. SeaWorld has done pretty well boosting admission prices and in-park food prices up until now. However, there's going to a come a time where traffic simply starts to decline if prices rise too quickly. The past quarter saw traffic rise by a paltry 2%, and that was with the help of an earlier Easter. Realistically, without these price increases SeaWorld would have struggled to deliver any organic growth. The worry I have is that Shamu and its marine-themed parks simply don't have the branding draw that Disney has with its media connection, or even Six Flags has with its thrill rides.
Finally, SeaWorld has little control over many aspects of its operations. Sure, SeaWorld can do its best to control costs, expand product offerings, open up in new markets, and cater to different consumers. But, ultimately SeaWorld can't do a darn thing if the economy dips back into a recession, consumer spending suddenly drops because of a tax increase, a hurricane or other natural disaster strikes a theme park, or multiple other unforeseen events strike. That's a big problem with its S-1 also noting that 55% of its total revenue comes from Florida -- a state often slammed by hurricanes and other bad weather.
My suggestion would be to enjoy the occasional trip to a SeaWorld theme park but keep your investable cash a safe distance from Shamu!
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