SeaWorld's Dilemma

| About: SeaWorld Entertainment (SEAS)

Summary

SeaWorld has not solved its publicity problem because the orcas are still in its tanks.

A solution would be to put the orcas in oceanic sea pens.

SeaWorld may need to split up. It can have the zoological part be a non-profit and the rollercoaster part be a for-profit theme park.

Any investor trying to determine whether SeaWorld (NYSE:SEAS) is a good investment needs to figure out what the end game of the battle with animal activists will be. SeaWorld management wants investors to believe a turnaround is now in place with the decision to stop its orca breading program. This decision came after mounting pressures by activists for years which finally hit a climax when the California Coastal Commission accepted SeaWorld's Blue World Project, but in the process said SeaWorld had to end the orca breeding program. An analogy to this situation is a kid who is forced to eat his vegetables after being threatened with not getting any ice cream.

Like I said, SeaWorld management wants investors to believe it ate its vegetables meaning the situation is over. My opinion is SeaWorld ate its vegetables for one day, but it has to eat its vegetables tomorrow and the next day. The reason why this issue is not over with is that the whales that are still alive are still in SeaWorld's tanks. SeaWorld has done nothing, besides ending the theatric shows, to improve the lives of these orcas which means activists still aren't happy. The second issue is there in no logical reason orcas are the only animals which the public and animal rights activists are concerned with. This may be obvious, but some shareholders are probably not considering the next animal waiting in the wings after SeaWorld is forced to put the orcas in pens.

This trend is not something that can be predicted by an Excel spreadsheet. It is garnered by simply being in society and recognizing the changing awareness with regard to animal rights. The most recent example was the outrage over the shooting of the gorilla Harambe after a 4 year old child managed to climb into its cage. There is a change.org petition which has garnered 506,000 signatures to press charges against the mom who was watching the kid as this happened. 30 years ago people would simply be happy that the child survived, but outrage over the death of animals has now become the norm with Cecil the lion being another recent example.

Moving back to SeaWorld, CEO Joel Manby mentioned at the annual meeting that Baltimore's National Aquarium will relocate its dolphin population to a seaside refuge. It made the decision to do so after a 5 year research effort. The Baltimore National Aquarium ended its dolphin performances 4 years ago which means it can be thought of as a leading indicator for SeaWorld as the SeaWorld just announced it was doing so with its orcas. Because the Baltimore National Aquarium is a non-profit, it has to bend to the whims of the public more than a for-profit firm like SeaWorld. The negative ramifications a non-profit faces are immediate as in the donations can dry up. The negative ramifications for SeaWorld are the severing of some partnerships and a long-term slow bleed of customers as the word on social media spreads about what animal activists believe are bad practices. Eventually over time negative sentiment built up for SeaWorld. It has the potential to happen again with the sea pen issue.

Building sea pens for whales would be costly. Research needs to be done on how to properly make the transition and SeaWorld would need to move part of its business to the ocean. The firm would also have to have accelerated depreciation of the various tanks that would no longer be necessary. It also is questionable how SeaWorld could charge much money to have visitors simply look out at the ocean.

This is why it makes sense for SeaWorld to split itself apart. It should turn the zoological part of the firm into a non-profit and have the theme park with rollercoasters be a standalone for-profit business. The combination of SeaWorld's vast aquatic wildlife exhibits and rides was a unique combination in the industry as SeaWorld has celebrated it ever since the IPO. However, now it is not working and a big change must be made.

Another possibility would be for a big change in direction of the firm where it changed its mission to making sure all of its animals are in natural habitats. The problem for management is they are stuck in the past as far as what the public views is ethical for the treatment of animals. The company believes in treating the animals as best it can, while activists have an agenda which anthropomorphizes the animals at the SeaWorld parks. In this case the phrase 'the customer is always right' applies. Fighting on objective grounds has not worked for SeaWorld, so it has to adapt to the situation it finds itself in to turn itself around.

The chart from the Scout Finance App shows the problem in revenue growth as the negative headwinds from the animal rights activists prevent any consistency. Those past three years are with a strong economy (and 2015 had low gas prices) as the firm has lost market share. One can only imagine how bad things will get if a recession hits. I'd expect it to fare the worst out of the theme parks because its declining market share shows that customers aren't loyal.

The metrics in the Scout Finance App below are the estimates for 2017. Negative 0.1% revenue growth for its biggest quarter is not exactly stellar. It may get even worse if there is an economic slowdown which I am expecting. At that point the situation could get ugly. The one thing which has been holding up the stock is the dividend. It could be cut if the estimates for 2017 are not met.

Conclusion

SeaWorld is oversold as the stock went lower on the news of the Orlando shooting. This added to the weakness the stock was already seeing, causing it to close at its lowest price ever. With this context in place, the stock may have a short term rally. If it does, that could be your opportunity to sell the stock as its long-term fundamentals remain poor.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.