On Wednesday, after the market closes, SeaWorld Entertainment (NYSE:SEAS), is expected to post results for its third quarter of this year. For the quarter, analysts expect the company to report earnings per share of $1.22 on revenue of around $546.6 million. If it achieves this goal, the company's revenue will be approximately 4.6% higher than the $522.3 million it reported during the same quarter a year ago. However, before you get excited and call your broker, you should determine how SeaWorld stacks up against some of its peers.
How does SeaWorld stack up against its competitors?
In an effort to discern the significance behind the company's expected improvement in revenue, I dug into its numbers a bit and compared it to two other theme park operators; Walt Disney (NYSE:DIS) and Six Flags Entertainment (NYSE:SIX). While Six Flags is an easy comparable because it is, like SeaWorld, a company whose primary efforts are on its theme park operations, Disney is a bit different. In 2012 alone, Disney earned only 30.6% of its $42.48 billion in revenue from its Parks and Resorts operations. So, in an effort to make things as fair as possible, I segregated the Parks and Resorts segment from Disney and looked at its operating income instead of its net income. Likewise, I did the same with both SeaWorld and Six Flags.
Over the past three fiscal years, from 2010 through 2012, SeaWorld has grown rather rapidly. During this time horizon, the company's revenue increased by 19% from $1.2 billion to approximately $1.4 billion. In a similar fashion, Six Flags saw its revenue grow by about 17.2% from $913 million to $1.07 billion. Although both of these growth rates are attractive, they fall short of the almost 20.1% growth exhibited by Disney. In normal circumstances, it might be assumed that the higher growth rate would be achieved by the smallest entity, while the slowest growth rate would be achieved by the largest because of a limited capacity to grow. However, this couldn't be farther from the truth.
In the case of these three entities, we actually see that the smallest, Six Flags, saw its revenue increase the smallest, while Disney, an industry behemoth with revenue that is more than five times larger than both Six Flags and SeaWorld combined, enjoyed the greatest growth. Unfortunately, the cause underlying this apparent disconnect from conventional thought is likely impossible to determine definitively, but one possibility is that larger theme parks have greater market power and, in essence, a greater ability to attract loyal customers.
Margins are important too!
Irrespective of the cause of each company's revenue disparity, there is another interesting thing to note: Each company has seen its operating income rise at a very different pace from its revenue growth. As an example of this, while Disney saw its revenue grow faster than the others, it simultaneously had to contend with the lowest growth in operating income, which could also serve as an explanation for its faster revenue growth; customers are getting more bang for their buck.
Over the past three years, it has seen its operating income rise by 44.3% with its operating margin rising from 12.2% to 14.7%. Meanwhile, Six Flags, the smallest of the three, grew its operating income 201.8% with its operating margin rising from 7.4% to 19.1%, and SeaWorld saw its operating income rise by 293% with its operating margin rising from a low of 4.8% to 15.9%. This data point suggests that, while revenue has increased more at larger companies, operating margins have increased at smaller ones, but there isn't a concrete explanation in the growth rate of any one company's operating income.
Although we appear to be at a loss when discussing the growth in operating income for each player in the industry, the data does suggest that Disney is gaining revenue (read: market share) by accepting only a marginal increase in its operating margin. However, smaller companies are seeing their revenue grow more slowly, but their margins outperform Disney, as they appear to focus not so much on growth, but on profitability.
Using this as a premise for determining investment prospects, it would seem wise for investors who are interested in theme parks and who value a margin of safety to pick Disney since it is the biggest and healthiest company in its industry. However, for investors who are more focused on profitability, either SeaWorld or Six Flags should prove promising, as they offer investors with potentially greater growth as they mature, as well as significantly better margin improvements.