Please ensure Javascript is enabled for purposes of website accessibility

SeaWorld IPOs -- but Beware Sharks In the Water

By Rich Smith - Apr 20, 2013 at 8:45AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A heady valuation makes a splash with investors, but beware the terror that lies beneath.

Nailed it!

In Friday's IPO of SeaWorld Entertainment (SEAS -2.27%), private-equity powerhouse and still-SeaWorld majority owner Blackstone (BX) succeeded in floating an IPO (pun intended) at the very tippity-top of its hoped-for price range. The $27-per-share IPO valued the company at $2.5 billion -- and after a quick 24% spike on the first day of trading, the company now carries a humpbacked market cap of $3.1 billion.

Which is, quite simply, insane.

A whale of a market cap
Why do I think the SeaWorld IPO was overpriced, and that the post-IPO price spike makes the stock more so? Well, just look at the numbers.

Last year, SeaWorld earned all of $77 million from its business. It generated a bit more cash than that, granted -- $112 million, according to SEC filing. So viewed in the most favorable light, this $3.1 billion stock is now selling for more than 27 times trailing free cash flow. Even in an industry where the average business is expected to increase its profits at roughly 16% annually over the next five years, that valuation looks stretched.

Viewed less favorably, SeaWorld stock costs 40 times earnings. That's as compared with similar amusement park operators including Six Flags (SIX -2.77%), Disney (DIS -0.70%), and Cedar Fair (FUN -2.48%), which sell for anywhere from 11 times earnings (Six Flags) to 23 (Cedar Fair). So once again, the stock appears overpriced given that it carries a market cap higher than any of its peers. And this, of course, is before you even consider the effect that SeaWorld's $1.8 billion in debt has on the stock's valuation. Factor that into the picture, and we're arguably looking at an enterprise costing 64 times annual earnings, and 44 times free cash flow.

Feeding on krill
Granted, SeaWorld tried to allay investor concerns with assurances that it will be drawing down capital spending in the years to come, aiming to boost free cash flow and hold capex down to no more than 10% of annual revenues. Were this promise applied to last year's results, SeaWorld could theoretically have hauled in $50 million in cash profits than it actually did.

Still, that doesn't look like enough profit to justify the stock's price -- not to this Fool, at least. Fact is, even if SeaWorld makes good on its promise to begin paying a $0.20 quarterly dividend next quarter, investors chasing the 2.4% dividend yield that this implies look likely to take a bath on this IPO.

My advice to new owners of the SeaWorld IPO? Enjoy the ride while it lasts. Because sooner or later, you're gonna get dunked.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

SeaWorld Entertainment, Inc. Stock Quote
SeaWorld Entertainment, Inc.
SEAS
$54.76 (-2.27%) $-1.27
The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$102.42 (-0.70%) $0.72
The Blackstone Group L.P. Stock Quote
The Blackstone Group L.P.
BX
Six Flags Entertainment Corporation Stock Quote
Six Flags Entertainment Corporation
SIX
$28.06 (-2.77%) $0.80
Cedar Fair, L.P. Stock Quote
Cedar Fair, L.P.
FUN
$43.95 (-2.48%) $-1.12

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
331%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/21/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.