- SeaWorld reported a terrible quarter earlier this week.
- Investors heard from the company that the 'Blackfish' documentary is hurting traffic.
- After the meltdown shares are very cheap for those investors willing to take the risk.
Well, that was ugly. Yesterday, SeaWorld (NYSE:SEAS) shares were absolutely crushed, losing around one-third of their value in a single day on the back of a disappointing earnings report in which the company acknowledged the 'Blackfish' documentary that has charged up animal rights activists and slowed park traffic as a result. Shares of the entertainment company are now trading for half their 2014 highs as the bottom has completely fallen out for SeaWorld. After getting crushed, are shares worth a look?
To start, I'd be remiss if I didn't mention my bullish article from no more than nine days ago. At the time shares were trading for ~$9 higher than they are right now and obviously, the timing of my bullish call was about as bad as it gets. It was a mistake to get behind the company's shares when I did but everyone makes mistakes and when Mr. Market informs you that you are wrong, all you can do is pick up the pieces and evaluate the case going forward. So, that's what I'll do here.
Now that we have that unpleasantness out of the way, we'll get to the news that caused SeaWorld to lose a third of its value in one day. Let's not mince words; the earnings report was terrible. Not only did the company have a revenue miss of nearly 10% but it also had an even larger EPS miss of more than 25%. That is awful and shares deserved to get punished for this kind of nonsense. It's never okay to miss revenue and EPS that badly and since SeaWorld did just that, it was duly punished.
However, let's examine exactly how bad the numbers were, in particular the guidance, and then compare it to the reaction from the market. SeaWorld guided for 2014 revenue to hit $1.46 billion, a decrease of 6% to 7% from last year. That's certainly not good but considering analyst estimates built a consensus at $1.5 billion, is the miss really that bad? We're talking about $40 million in revenue, or a 2.7% miss for the year. I'm not saying that the revenue miss isn't that bad but we didn't hear that revenue was going to be down 20% or something; this is a minor miss.
In addition, we now have a $250 million buyback program that was announced yesterday as part of the earnings report shenanigans but it seems that no one noticed. That buyback, at today's share price, will repurchase nearly 15% of the company's outstanding shares. That is one of the largest buybacks I've ever seen and I think it's terrific. In addition, we aren't talking about an unheard of amount of money that SEAS will need to borrow.
Keep in mind that SEAS is now trading for 11 times next year's earnings so that leads me to believe that either investors have reduced the value of SEAS' earnings to the point where it will trade like a company that is slowly going out of business or it thinks reality will be even worse than the company's guidance. The bloodbath yesterday makes me think that investors have already discounted a much larger decline in revenue and profits for the year than the company guided for and that presents an opportunity for investors. If SEAS gets close to its projected earnings for next year we should see the stock into the mid-$20s in a couple of quarters. If it can get it together and get people back in the park and, also importantly, get average spending to tick higher again, we could be talking about $30 next year.
One final note; Blackstone (NYSE:BX) still owns a significant piece of SEAS even after the IPO and if shares remain cheap enough for long enough, it wouldn't put it past the company to take SEAS private again. The company received offers from interested parties prior to the IPO and at this point, I have to think that there are still interested parties out there that would jump at the chance to buy SEAS for ~$2+ billion. I can't say this has a high likelihood of occurring but at the same time, I wouldn't be surprised either. SEAS is still an enormously valuable franchise and the transitory issue of 'Blackfish' will go away at some point. Owning SEAS here is a high risk, high reward proposition but for those willing to take the plunge, we could see significant value accrue from here for longs.