Theme park operator SeaWorld Entertainment (NYSE: SEAS ) has been under the microscope lately as the subject of a recent damaging documentary by a killer whale trainer who was previously employed by the company. The film comes on the heels of a 2010 employee fatality caused by a killer whale, a tragedy that led to a Department of Labor investigation and subsequent sanctions. Despite the problems, though, SeaWorld has been posting solid park-network attendance figures, with 24 million guests visiting in 2012. So, should investors bet on this marine wonderland?
What's the value?
The theme park industry has had a nice rebound over the past few years as customers have anecdotally gravitated toward lower-cost vacation destinations. Data provider IBISWorld estimates that the industry currently attracts roughly 315 million visitors to its domestic parks each year. SeaWorld has a strong industry position as it owns five of the top twenty domestic parks, most of which are located in year-round, high-traffic tourist spots like Florida and California. While the company's animal and nature-oriented parks require higher cost structures due to animal welfare and food costs, SeaWorld has benefited from a global population that seems increasingly interested in eco-friendly tourism options.
In fiscal year 2013, SeaWorld posted mixed results as it generated a 2.4% top-line increase despite hosting fewer total guests. Revenue benefited from a strong pricing environment, with revenue per capita up 7.5%, as well as from further expansion into water parks that included the acquisition of Knott's Soak City from competitor Cedar Fair in November 2012. SeaWorld's profitability has also improved due to fewer admission promotions and its success at driving higher in-park spending through more diverse dining options.
Given the fairly prohibitive replacement costs of theme parks and their solid operating fundamentals, an investor should have an allocation in the space. While SeaWorld's bad publicity is unlikely to lead to long-term damage in attendance, it might force a change in the company's operating practices and raise its animal-welfare costs, crimping future profitability. As such, investors might want to focus on more diversified operators in the space, like Six Flags Entertainment (NYSE: SIX ) .
Six Flags sits atop the regional amusement-park space, operating eighteen properties in metro markets around the country that are conveniently located within fifty miles of roughly 100 million people. Unlike SeaWorld's fairly even mix between rides and attractions at its parks, Six Flags' parks are all about thrills with a cumulative total of 800 rides and 120 roller coasters at its properties. Of course, thrilling customers comes at a cost as the company has to spend roughly 9% of its revenue annually to brainstorm and construct bigger and faster rides that will keep its customers coming back for more.
Like SeaWorld, Six Flags has benefited from an improved pricing environment lately, and it posted a 3.2% top-line gain in FY 2013. The company similarly enjoyed a pickup in revenue per capita, which was up 2% thanks to its focus on growing its sales from higher-priced season passes. More importantly, Six Flags' adjusted operating profitability improved significantly, due partially to insourcing its concession activities at certain parks as it works to meet management's ambitious goal of $500 million in EBITDA by 2015.
Investors looking for even more diversification on a global scale might also want to consider Disney (NYSE: DIS ) , a company that derives nearly a third of its total revenue from its parks and resorts segment. While Disney has fewer parks than Six Flags, Disney has positioned its parks in domestic and international tourism hotspots including Shanghai, China where the company hopes to open its newest park sometime in 2015. In addition, the company benefits from its ownership of hospitality ecosystems built around its parks. This is most notable at its Walt Disney World property, where higher spending and rates at its hotels, golf courses, and conference centers led its parks and resorts segment to post double-digit operating profit growth in FY 2013.
The bottom line
With its animal friends playing a starring role at its parks and creating much of the company's value, SeaWorld needs to be careful not to taint its image as an animal kingdom protector, something it has carefully cultivated through its Conservation Fund and rescue programs. Until the company can put the allegations to rest, theme park investors should put SeaWorld on the back burner in favor of Six Flags, a solid operator that comes with a nice dividend.
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