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Summary

  • SeaWorld sold off significantly following a weaker than expected Q2 '14.
  • Markets have overreacted.
  • Share price upside will be driven by 4 key catalysts.
  • Attractive dividend yield of 4.2%.

Introduction

SeaWorld (NYSE:SEAS) went public in April 2013 and since then has significantly underperformed the market. After reporting a weaker than expected Q2 '14 result, the stock sold off significantly. We believe the market has overreacted, and investors should consider this a meaningful buying opportunity.

SEAS Chart

SEAS data by YCharts

Catalysts to Share Price Upside

The main catalysts to share price upside and reasons to buy the stock include:

  1. Little/no new supply of theme parks coming online
  2. Attractive dividend
  3. Reasonable valuation
  4. Increased attendance as the economy recovers

Business Description

SeaWorld is a theme park and entertainment company that operates a portfolio of globally recognized brands including SeaWorld, Shamu and Busch Gardens. The portfolio consists of 11 destination and regional theme parks that contain approximately 86,000 marine and terrestrial animals.

Revenues are driven by attendance prices for admission, food and beverage, merchandise, and other in-park experiences. During 2013 approximately 23 million people visited SeaWorld, including 3.7 million international guests.

Source: 2013 annual report

SeaWorld's EBITDA margins have ranged from 22%-28% since its IPO in 2013. Profit margins have been relatively low between 2.5%-6.5%.

SEAS EBITDA Margin (<a href=

SEAS EBITDA Margin (TTM) data by YCharts

1 - No New Supply Expected

The theme park industry in the US is fairly mature with almost no supply growth recently. Part of the reason for this is that barriers to entry are quite high. The main impediments to entry include: high land costs, zoning requirements, infrastructure, and access to capital. As the economy continues to recover, we believe discretionary spending will pick up, which will drive revenues higher as supply remains flat.

2 - Attractive Dividend

SEAS offers a great dividend yield at 4.2% with a reasonable payout ratio of 75% (trailing twelve months).

SEAS Dividend Yield Chart

SEAS Dividend Yield (TTM) data by YCharts

3 - Reasonable Valuation

SeaWorld is currently trading at 8.3x 2015 EBITDA and 18x 2015 Earnings. Based on the consensus growth rates expected by analysts for EBITDA and EPS, we believe SeaWorld is relatively undervalued.

(click to enlarge)

Source: Author's analysis and Capital IQ.

4 - Increased Attendance

Since 2009, US household financial obligations have steadily decreased, which has contributed to a rise in disposable income and will create further tailwinds for theme parks.

US Household Financial Obligations Chart

US Household Financial Obligations data by YCharts

Conclusion

Investors have overreacted to the latest quarterly result, most likely as a result of capitulation after a lackluster performance since IPO. This presents a compelling buying opportunity for investors based on: (1) lack of new supply, (2) the dividend yield, (3) a reasonable valuation, and (4) further upside as the economy continues to recover.

Source: SeaWorld: 4.2% Yield And Plenty Of Upside Potential