SeaWorld Entertainment (SEAS) released disappointing earnings results for Q2 2013 sending the shares down 12% in after market trading on Tuesday. Total Q2 revenue fell 3% to $411.3 million and adjusted EBITDA was down 10% to $127 million. Adjusted net income dropped to $0.41 per diluted share:
The Company reported a net loss for the second quarter of 2013 of $15.9 million, or $(0.18) per diluted share. Adjusted Net Income was $36.5 million, or $0.41 per diluted share, in the second quarter of 2013. In the second quarter of 2012, the Company reported net income of $39.1 million, or $0.47 per diluted share.
Management attributed the drop in revenue to lower attendance in the second quarter which was down 9% from 7.2 million people in 2012 to 6.6 million in 2013. Three things caused the drop: (1) unusually bad weather (2) the fact that Easter was in Q1 versus Q2 in 2012 and (3) the anticipated admissions drop due to a 9% increase in ticket prices from $35.74 to $38.85 per capita. However, during the earnings conference call (link below) it was noted that with fewer people in the park, guests have a "better experience", and costs will also go down. The total increase per capita rose 7% for Q2 from $58.75 last year to $62.67 due to other "targeted increases" in the park. Most of SeaWorld's revenue for the year is generated in Q2 and Q3:
The theme park industry is seasonal in nature. Based upon historical results, we generate the highest revenues in the second and third quarters of each year, in part because six of our theme parks are only open for a portion of the year. Approximately two-thirds of our attendance and revenues are generated in the second and third quarters of the year and we typically incur a net loss in the first and fourth quarters.
Additionally, total revenue for the first two quarters was $649.9 million up 2% over 2012. During the earnings conference call Tuesday evening, SeaWorld CEO Jim Atchison said that the third quarter produces almost 60% of the EBITDA for the year. And CFO Jim Haney added that the "deferred revenue" of $150 million is up 7% and will be recognised later in the year:
So, to give a little more context, our Q3 number is about 55% to 60% of our EBITDA for the year. And with these new attractions in place and the assets we have from them, we were here confirming this guidance as we move forward.
Those assets are the new Aquatica park now open in San Diego, and the Antarctica Empire of the Penguin exhibit and ride at SeaWorld in Orlando, Florida. Both of these "assets" promise to be revenue magnets for years to come. The Antarctica exhibit already has long lines reported to be up to 2 hours long. Some investors are worried about this, but the company is happily raking in the cash which will show up as added volume in Q3. This could make the third quarter results historically high.
Pictures courtesy of SeaWorld.com
Using the information above, it is easy to determine what some of those results will be. The average estimate for the company's 2013 revenue is $1.49 billion. The company just issued new revenue guidance of $145b to 148b for 2013. Considering the fact that the first 6 months revenue is almost $650 million or 44% of the analysts' average estimate, that number is very doable. Since 2/3 of the revenue for the year is generated in Q2 and Q3, then: .66 X $1.49B = $983.4 million - Q2 $411.3 million = $572.1 million in projected revenue for Q3 2013. If we compensate Q2 3% for Easter the new number is $423.6 for Q2 and $559.8 for Q3 revenue. Additionally the new 7% increase per capita minus the expected 3% drop in admissions will produce an additional 4% in revenue for Q3. Using the high estimate of $572, the new projection could be close to $600 million for Q3.
SeaWorld also expects EBITDA for 2013 to be between $430 and $440 million. This is unchanged in spite of the new lower guidance for revenue, because management is "keen on costs" and the business itself is very "nimble". Labor and other costs can be adjusted immediately. Using Atchison's formula of 55-60% EBITDA in Q3: the low number would be .55 x $430 = $236.5 million, and the high number would be .60 x $440 = $264 million EBITDA in Q3. That is an extremely large number considering the fact that the total EBITDA for the first half of 2013 was only $138.1 million. This means that for SeaWorld, Q3 will bring a whole new meaning to the "Golden Quarter" that other service industries enjoy in Q4.
The first 6 months of EBITDA at $138.1 million was generated from $650 in revenue. So even if the EBITDA for Q3 is the low number of $236 million, the revenue will probably be much higher than my $600 million projection. If the company can produce these Q3 numbers the stock should take off. The key word here is "if". Even though the company has been around forever, this management team is new to operating as a public company. The IPO was just issued in April of this year. However we are half way through Q3, which means that Atchison already has a handle on it. The data for sales in Q3 must be way up for him to remain so confident.
With the new attractions tourists will be flocking into the parks. A lot of them might opt for buying a season pass to SeaWorld rather than a more expensive vacation somewhere else. And with all of the regional parks in heavily populated areas, some families are choosing to stay close to home this year, or take day trips. A "staycation" can be very popular right now when a family's budget is tight due to back to school expenses. As with all entertainment businesses, the crowd is drawn to the newest thing. For the near future, SeaWorld is capitalizing on that. This Q2 "miss" is actually a lot of free advertising for the parks, which should bring in even more revenue.
When compared to the other three market indices SeaWorld has been up until this recent Q2 stumble:
SeaWorld closed at $33.49 Thursday, considerably lower than the lowest price target of $37.00. There is a major upside here if the next earnings announcement includes big gains:
SeaWorld Price Target Summary
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Data provided by Thomson/First Call
To invest in SeaWorld right now would be a leap of faith. However if Q3 comes slamming in the way these numbers predict it will, the price of the stock will have jumped and the opportunity for a big gain will be over. The market continues to flirt with a correction which could bring the price down a little bit more for another chance to buy the dip. But there will be some investors that sell strength and buy weakness during a downturn. It is human nature to lock in profits and look for "deals". That could mean that this dip is the only dip. All stocks are a gamble, especially one like this that doesn't have a recent public track record yet. That is why the possible reward is so high.