- SEA's Blackfish fiasco is increasingly likely to affect the year's earnings and outlook and may present an excellent short opportunity.
- Brought public in a leveraged buyout and massively indebted, SEAS is grossly overvalued for a company of its maturity and compared to peers with less forward looking risks.
- Blackstone and company insiders will continue to head for the exits ahead of 2014's Q2 and Q3 earnings results.
Sea World Inc. (NYSE:SEAS) has had its share of headaches since their public offering last spring. News seems to pour in by the hour and has accelerated exponentially since the media outlet behemoths CNN and Netflix (NASDAQ:NFLX) began airing the controversial documentary 'Blackfish'.
The slant of the film has been questioned considerably and SeaWorld has gone to great lengths to discredit it. Nonetheless, the company has found itself in hot, shark-filled waters and its ability to divert investors' attention from the circling fins will continue to diminish.
The extremes that SEAS willingly goes to increasingly grow suspect and the language and tone of the recent Q4 call should be closely scrutinized to assess the management's fear or confidence in what future material effects may be.
Being that SEAS popped +8.4% the day the film wasn't nominated for an Oscar and more recently, slumped -5.4% when a California lawmaker proposed a bill banning the use of Orca Whales for entertainment, we have had several indications of Wall Street's weighting in regard to potential implications from the film's mass distribution and the public's reactions.
My comments here will not shed much further light on the material of the documentary or make assumptions toward the ethical treatment of marine animals by SeaWorld. If you're interested, trust me, it's a very interesting topic to skim through via your favorite search engine.
By pointing out some of SeaWorld's PR nightmares, blunders, and misbehavior, and by delving into SEAS's capital structure and business risks, I'd like to describe to you why I feel SEAS's '14 earnings will make a great candidate to short while Blackfish remains an active dialogue in the collective American Psyche.
The Conference Call
I feel that although SEAS has already stated a record Q4 attendance number (note: busiest/critical Qs are Q2 & Q3) and full-year '13 at a record revenue, the coming quarters may present to be a great short. The conference calls and reactionary public statements/actions also present an opportunity for us all to sharpen our abilities to detect dishonesty, persuasion and skewed data by fishy corporate managements.
SeaWorld's Recent Splashes in the News
After coming public, SeaWorld has spent its fair share in the spotlight, aside from the recent proposed ban of Orca captivity in California and the OSHA ruling forbidding trainers from the Orca tanks, the PR team has had a lot on its plate:
Bindi Irwin, daughter of animal rights icon Steve Erwin, was criticized by the media and her grandfather (Steve's dad) for becoming SeaWorld's Youth Ambassador. Read it in this New York Daily News article here.
This has propelled her onto celebrity websites such as TMZ.com where she can be seen cut off from a reporter by a "handler" when asked about the 'Blackfish' controversy.
PETA, which owns 80 shares of SEAS and attempted to bring a proxy to the board of directors asking that whales be moved to coastal sanctuaries and retired from entertainment (take note Carl Icahn!) slammed the move, "Bindi's talk-show appearances are just a flimsy last-ditch effort by an 'abusement' park hoping to make a buck."
San Diego is a SeaWorld war zone in the wake of the proposed Orca captivity banning California legislation, which would be devastating for the city's as well as SEAS's coffers.
An oldie, but a goodie: Possibly my favorite of the past few months was the SeaWorld sponsored Opinion Poll in which over 50% of the respondents came from a single IP address belonging to, you guessed it, SeaWorld! This was shortly followed up with a nationwide newspaper ad campaign touting its history rehabilitating animals, with no mention of the film.
In a later poll, reported here by Skift via Business Insider, much different numbers emerged: "According to Skift's survey, about 75 percent of Americans are oblivious to the controversy, with only about 28 percent of Americans saying they are less likely to visit SeaWorld, post-Blackfish. Of course another way of looking at the results is that one single documentary has been able to change the perceptions of slightly less than 1/3rd of Americans in one sweep."
My other favorite was little noticed, at least as far as I could tell, in the blogosphere. Sure, it was controversial that SeaWorld brought penguins onto the floor of the NYSE after PETA convinced a local restaurant to cancel their 50th Anniversary Party (they'll celebrate this for 18 months beginning this month) which PETA had threatened to protest, concerned for the penguins being subject to stress and noise. No one seemed to notice that they were carrying large, gaudy stuffed dolphins, amidst all their Blackfish controversy and during the most gruesome weekend of the Taiji Dolphin Slaughter, which had "dolphin" as a top trend word for practically an entire week at CNN.com
(click to enlarge)
The sponsors and partners have been petitioned, influential musicians canceled their performances and company ties, and children even protested their school field trips (one notably went whale watching). For SeaWorld the viral nature of the Blackfish backlash seemingly has no end, with each problem adding fire to the next.
A quick peek at SEAS's fundamentals and we find a company encumbered in debt (the result of The BlackStone Group's (NYSE:BX) leveraged buyout) trading at a P/E ratio typically reserved for younger growth stocks:
- Market Cap: 3.04B
- Trailing P/E Ratio: 50.26
- Forward P/E Ratio: 19.9
- Price/Book Ratio: 2.17
- Debt/Equity Ratio: 225.36
- Long-Term Debt: 1.63B
Yielding about 2.5% and richly overvalued in its present risk environment, I am expecting to see an eventual move below $30.00 a share as investors fret over the upcoming quarters. I feel that it could again test levels seen just before the Oscar's "non-announcement" as investors will need to see a strong Q2 & Q3 before committing more purchases. I think the company simply needs a much higher yield and more earthbound valuations to be attractive in light of the unfolding change in cultural perception of the parks and the possibility for Government regulation. This obviously is not a company you want to buy and close your eyes for 10 years.
In light of OSHA banning their trainers from being in the pool with the whales, anti-captivity proposed legislation proposed by States with and without captive Orcas (notably New York), and the continuing viral 'Blackfish' contagion, I am shocked the share price has any buoyancy whatsoever. I wouldn't be surprised to see this IPO underwater before its one year anniversary as their worst nightmares walk right out of their corporate filings' "Risk Factors" section.
Insiders, namely the CEO have been selling shares feverishly. As of the time of writing, the BlackStone Group is no longer a "controlling interest" and has reduced its holdings to about 25% from approximately 43% of the company. We will see even more hurried exits.
The Attendance Effect
A small percentage change in attendance could have drastic effects on earnings and revenue. The company has fought declining attendance by being able to garnish an increase of onsite spending per ticket, all while discounting tickets to spur traffic. The elimination of an entire park's (e.g. San Diego) ability to entertain with dolphins and Orcas could potentially halve the park's ability to sell tickets.
Here is where they face the most basic conundrum of economics, the effect of pricing on demand. Declining attendance can only be thwarted with higher per capita sales, until those prices begin to deter attendance.
What is shocking are the bullish post-call articles citing the lack of a 'Blackfish' effect. Due to the timing of its release en masse via Netflix and CNN (the last month of Q4), we are unlikely to see any material effects until Q1 results.
With the vast majority of SEAS's revenue generated in Florida it's also important to consider that the Orlando park is not only extremely sensitive to economic downturns and reduced middle class vacation spending but also competes for the "extra day" people choose not to spend at larger local draws such as Disney's (NYSE:DIS) Disney World. One author argued that it may benefit from local "staycations" due to the soft economy. Perhaps the company will see attendance support by way of their 50th Anniversary Promotions, possibly staving off any 'Blackfish' induced decline in attendance. This however does not compensate for region-specific risk such as the hurricane season, weather, and competitor pricing and promotions. The stock should also price itself for something far worse, such as a violent act by an impassioned animal rights' advocate.
The Big Picture
Personally, I feel that the captive display of marine mammals for entertainment purposes will be an antiquated practice in the developed world within my lifetime. I will be watching the events and quarterly results carefully as I feel this to be a whale of a short.
How to I'll Play the Stock in 2014
A viable strategy would be to position long-term puts on any strength in the stock to capture any surprise negative events and to play weekly just out-of-the-money puts with expirations shortly after conference calls, more confidently betting against the all-important Q2 and Q3.
I began this strategy leading up to the Q4 call by purchasing a stake in the March 22nd $32.00 strike puts for $0.25. I locked in gains prior to the call, selling 4/5ths of the position at $0.80, or up 320%. This easily locked in a gain for the trade while still allowing a portion to ride through the call (which I sold for a small loss).
I will be expecting similar price movements leading up to the year's quarterly earnings with the strong potential for further downside in the stock should there be increasingly negative results.