SeaWorld (NYSE:SEAS), a public company operating aquatic educational and entertainment theme parks, has recently found itself under attack by the media and animal rights activist groups following last summer's release of Blackfish. This film, combined with seasonally harsh weather, bad timing of holidays, and limited promotional activity, has caused the stock to reach a level we find attractive for long investors. SEAS currently trades near its all-time low, but we believe that the worst is behind it.
At $28/share, SEAS trades at a discount to peers, even as it begins to show accelerating growth off a weaker year. This is an attractive investment with potential for longer term return on invested capital in excess of 15%. This year presents several catalysts, such as growth through its largest new attraction ever, Antarctica, the upcoming 50th anniversary celebration, higher ticket prices, a captive audience, increased operating leverage, and consistent FCF generation. At these prices, we believe there is 50% upside in SEAS stock price.
Most recently, the stock has been under pressure as a result of the documentary Blackfish released last July. The film was directed by Gabriela Cowperthwaite, who previously directed City Lax: An Urban Lacrosse Story. The film attempts to portray SeaWorld as an insensitive corporation that treats large killer whales inhumanely. The director does a good job of negatively positioning SeaWorld through interviews with former SeaWorld trainers and film clips showing the whales in their limited living habitats within the parks. While we found the film to be educational, we also concluded that the director had a singular and myopic objective in directing the film and as a result, the film lacked objectivity. Our position is that there is no axe to grind against SeaWorld. The company does not take whales from the wild and does not act in a manner any differently than other amusement parks, zoos or aquariums that hold species in captivity. Furthermore, the company has become a favorite target of animal rights activists because it is now a public company. In fact, we would argue that the safety record at SeaWorld and the money spent on education and conservation at SeaWorld is far greater than 90% of the zoos, aquariums and other theme parks around the world. While we are not proponents of captivity, we recognize that there are educational benefits that come from placing humans in close contact with animals other than in their natural habitats. Below are some facts that further illustrate that the business of SeaWorld is not unique when it comes to operating activities with captive animals and aquatic life.
Here are the facts:
· There are roughly 2,100 zoos and aquariums worldwide with 385 in the U.S., 300 plus in Germany, 95 in Japan and 80 in Australia.
· Approximately 5 million total animals in captivity
· 175 million visitors to zoos per year in the U.S.
· Over 40 deaths in U.S. zoos/aquariums since 1990
SEAS operates in an industry that is constantly targeted by activism and is now shouldering the brunt of the attacks as a result of the documentary. However, this activism has overhyped the decline of SEAS, and has minimal impact on the business itself, which is returning to record attendance and profitability.
SEAS was sold by Anheuser-Busch to Blackstone in 2009 as part of a cash raise to fund the AB InBev acquisition. Blackstone has exhibited the ability to successfully manage theme parks, as seen by its partial ownership in Merlin Entertainment Group (#2 theme park operator in the world) and Universal Studios (#3).
The SEAS theme parks include: (worldwide ranking/US ranking)
SeaWorld Orlando (19/10)
SeaWorld San Diego (22/11)
Busch Gardens Tampa Bay (23/12)
Busch Gardens Williamsburg (NR/18)
SeaWorld San Antonio (NR/20)
As well as five other water parks and two specialty parks. Overall, SEAS is the sixth largest theme park operator worldwide. What is unique about SEAS is although its parks compare similarly to other regional park operators such as Cedar Fair (NYSE:FUN) and Six Flags (NYSE:SIX), the bulk of their parks and revenue are derived from the large tourist markets of Florida and Southern California, where Disney (NYSE:DIS) and Universal Studios (private) operate.
2013 Stock Performance
SEAS IPO-ed at $27/share and surged 24% in the first day. The stock hit a high of 39.65 before tumbling down the past few months to under $30. Outside of Blackfish, a couple of other reasons caused this decline:
· Seasonally bad weather: SEAS generates a majority of its revenues and all of its EBITDA in the second and third quarters. It's geographically centered in Florida, with 50% of total revenues originating from the state. In 2013, rainfall increased over 100% from average during April to June in Orlando, leading to depressed attendance. SEAS parks are also more sensitive to weather compared to Disney and Universal because their parks do not include on premise hotels. Therefore, tourists are less "locked-in" and more likely to cancel due to weather. SEAS' regional parks, such as Busch Gardens in Tampa, are even more susceptible to these weather cancellations due to their local nature. These smaller market parks have a higher composition of seasonal pass users as opposed to one time tourists. That being said, SEAS realizes these deficiencies and has been investing in their online channel; approximately 30% of their tickets are purchased online/prepaid, which helps reduce unexpected cancellations. Overall, weather accounted for a third of the attendance decrease in 2013.
· Early Easter: Easter occurred early this year and was pulled into Q1. This caused the holiday weekend to overlap with Spring Break for many families. The shift resulted in one less large weekend for SEAS and also affected the more profitable Q2 quarter. 2014 will have a normalized schedule with Easter falling into Q2 again. This accounted for a little less than a third of the attendance decline.
· New ticket pricing: SEAS experimented with new ticketing promotions this year. While the system isn't completely dynamic yet (besides at Discovery Cove), the focus for management this year was to increase revenue per visitor. SEAS removed large discounts and focused on driving visitors to parks during the Monday through Friday slots. As a result, although total attendance decreased 5%, revenue per user has increased 10%. We see this as very accretive to SEAS bottom line, and expect the company to continue to maximize top and bottom line through pricing adjustments. This accounted for a little more than a third of the attendance decline.
· Concerns about Blackstone selling: Blackstone has been selling stock after the lockup expired in mid-October. The market has been concerned about further selling, but we want to mention that the secondary was actually oversubscribed at $30/share.
· Blackfish impact is overblown; concert cancellations will have zero impact on attendance: We have spoken to the company about potential issues with Blackfish. SEAS was very adamant and clear with us regarding attendance - there has been zero impact and there is not expected to be any future impact from the Blackfish fallout. The company mentioned that this level of activism occurs in all wildlife/animal parks, and SEAS is very familiar with dealing with these issues over the past 50 years. It isn't any more impactful or significant than before, and the only reason it seems to be a bigger deal this year is because SEAS is now a public company. In addition, SEAS believes that it will be fully able to rebook headliners for its Bands, Brew, and BBQ event at SeaWorld Orlando in Feb 2014. We want to point out that event is free (with regular park admission), so SEAS is not losing revenue on pre-sold concert tickets. Furthermore, this event occurs in the slow Q1 season and only affects a single park. It's interesting to note that Busch Gardens Tampa has the same event with performers such as The Beach Boys, Barenaked Ladies, and Goo Goo Dolls, and has not seen any cancellations nor any activism.
· New attractions and 50th anniversary celebration will drive 2014 growth: SeaWorld Orlando opened Antarctica, its largest attraction ever. Initial reception has been fantastic, and due to the high turnover for first time visitors at SeaWorld Orlando, we believe that this attraction will continue to drive visitors to the park. When SEAS opened the One World One Ocean show and Turtle Reef at SeaWorld San Diego in 2011, attendance jumped 13% (3x the industry). We believe that the Antarctica attraction can easily exceed this growth. Even with weather issues, SEAS is currently experiencing record years at its parks. SEAS has also been busy at the other parks in preparation for their 50th anniversary in 2014, with new attractions at nine of their parks planned to open. This includes a new area in SeaWorld San Diego and the opening of the tallest freestanding drop tower in North America at Busch Gardens Tampa. All these attractions are expected to open after Memorial Day, and will continue to generate interest well into 2015.
· Easy comp and balanced pricing model will growth both revenue per visitor and attendance:
As mentioned prior, weather, pricing, and the holiday schedule caused 2013 to be a weak year when solely looking at attendance. With the return of the holiday season to Q2, the strong performance of the Antarctica exhibit, and (hopefully) normal weather, we should expect SEAS to reaccelerate growth. However, the more exciting opportunity is when SEAS begins promotional pricing again. Promotional activity was minimized in 2013, and as it resumes, we believe that SEAS will be able to capture an increased audience that they did not capture this year. The industry as a whole has raised prices Y/Y, and we believe that the market can sustain higher prices with minimal impact to attendance. As management targets both attendance growth (1/3 of total growth) and revenue per visitor growth (2/3s of total growth), we believe that SEAS is in position to have a very big year.
· Shift into multi-park and multiday passes and online: With the build out of the Aquatica water parks, SEAS now has a multi-park strategy around its main locations. The company should see strong cross selling as visitors are incentivized to buy higher priced passes. Expansion into the online channel (using promotional activity) should help mitigate cancellations and also drive increased operating leverage.
· Inflated concerns on new Harry Potter expansion: Concerns about the opening of Harry Potter 2 at Universal Studios has also muted SEAS prospects. However, we believe that SEAS' differentiated and niche product (marine wildlife) will help separate itself from just another theme park. The company has also stated that they don't expect as much initial demand with the Harry Potter 2 opening as they saw with Harry Potter 1, due to the lack of new books, movies, and media associated with the franchise. We also believe that more tourists are willing to try SEAS' parks now, as two thirds of all visitors are repeat visitors whom may have already visited Disney and Universal the first time around.
· Continued operating leverage and solid FCF generation: SEAS expects that 2014 growth will generate at a minimum of 50% flow-through from revenue to EBITDA (historically this has been closer to 66%). We believe that as the company reaccelerates growth this year, we will see significant contributions to cash flow. Combined with visibility on capex (due to the length of projects), the company is expected to generate around $2.50/share in cash flow. More importantly, we want to stress that this cash flow is very stable and predictable. We expect some margin expansion as well, as expenses from opening the Aquatica parks in 2013 should roll off. Also, SEAS will not have to pay advisory fees to Blackstone, which ranged from $5-6 million a year for the previous four years. Increased sales and marketing spend this year has further positioned the company well for 2014 and beyond. If we examine SEAS' peers, we see that SEAS still has significant room to expand EBITDA margins through smoothing out traffic throughout the week and improved park operations. Cedar Fair operates at EBITDA margins of 700 bps higher, and we believe that SEAS can close the gap through better park management.
The North American theme park industry is expected to grow at 3.5%, and we believe the SEAS can easily exceed this. SEAS is currently trading at a discount to peers, and should trade at least in line with its regional comps at 11x EV/EBITDA. In addition to the $2.50/share in FCF it should generate in 2014, SEAS currently yields a 3% dividend. At $5/share in EBITDA in 2014, we believe that SEAS is currently worth $42-44/share, or 50% upside. We believe that there is minimal downside due to the value proposition and steady EBITDA and FCF that SEAS generates. Our downside scenario assumes minimal growth and continued shrinking of the multiple down to 8x EV/EBITDA. Even at these levels, the stock is worth $24-25/share, or less than 15% downside.
Disclosure: I am long SEAS.
Business relationship disclosure: The article has been written by Goudy Park Capital. The author is one of the analysts at Goudy Park Capital. Goudy Park Capital is not receiving compensation for it (other than from Seeking Alpha). Goudy Park Capital has no business relationship with any company whose stock is mentioned in this article.