SeaWorld Entertainment: New Thrills Bring Upside Hopes For 2023 (NYSE:SEAS)

SeaWorld Entertainment, Inc. (NYSE:SEAS) delivered record-breaking top and bottom line results in FY21. FY22 has had more headwinds, impacted by inflation, labour shortages and a natural disaster. However, SEAS has a business model delivering results through more challenging times. The recipe to success has been increasing per capita spending rather than increasing attendee numbers, while international and group-organised visitors still need to be higher. This spend can be attributed to increased investment in facilities, technologies and pricing around merchandise, food and admission fees.

There is still a lot of upside potential if the company can increase its attendance to its previously historically high numbers. Although there is a lot of competition and alternatives, SEAS provides diverse activities at easy-to-reach day trip locations. Furthermore, some exciting new ventures exist, such as its first international park opening in Abu Dhabi and continued talks of onsite hotels. Therefore investors may want to take a bullish stance on this stock.

Overview

Five months ago, I wrote an article with an overview of SEAS. Since then, the stock price has increased by 9.72%. SEAS has made major restructuring and branding changes over the last few years, allowing it to compete with some of the top players in the industry. It has twelve theme parks across the USA and a portfolio of brands, including SeaWorld, Busch Gardens, Discovery Cove, Sesame Place and Water Parks. Revenue is generated through park admission fees, food, clothes and merchandise In-park spending was 43% of total revenue in FY21. Industry-wide parks increased their ticket prices in 2022. At SEAS, an individual could quickly spend $174.98 for a one-day ticket, single meal, drink and parking spot.

SEAS has also improved its top and bottom line results for the last three quarters, although it missed EPS expectations by $0.16 to reach $1.99 per share last quarter. SEAS competes against destination parks, such as Disney (DIS) and Universal (CMCSA), and regional theme park offerings, such as Cedar (FUN) and Six Flags (SIX). Earlier this year, SEAS made an unsuccessful takeover offer of FUN at $3.4 billion.

I have compared the stock’s performance to some of the top peers and seen that SEAS has provided above-average price returns over three years at 67.31%.

Growth Catalysts

One of the immediate growth possibilities for SEAS is its underutilised capacity. Previously attendance reached historical highs of 25 million visitors in 2008, compared to 22 million in 2022. Although SEAS had major branding issues post animal rights scandals, it has reinvented itself as a theme park with an animal conservation focus. If we look at the 4.5 rating by 87,186 Google reviews, it shows a positive sign towards customer sentiment.

This past quarter, international visitors were still down 45% compared to 2019, and group visitations were down 20% for the same period. If these numbers were to return, there could be some severe upside due to the high spending per capita statistics of $77.05 this past quarter, compared to $72.13 one year prior. SEAS has increased admissions per capita by 4.1% to $42.75, and people have increased their in-park spending by 10.4% this past quarter to reach $34.30.

SEAS’s downturn in attendees and closures has allowed it to focus on huge investments and upgrades to its parks. This spring, 2023, each park will be opening a first-of-its-kind ride, from a surf coaster in Orlando to a flume coaster in Antonio. This could create a lot of buzz and excitement to visit these parks. Below we can see the annual revenue in 2021 with fewer attendees than in 2019.

Future growth opportunities lie in the company’s soon-to-open and first-ever international SeaWorld Abu Dhabi location, which will be the largest aquarium on earth at 183,00m2 and across five floors. SEA has mentioned that it is a capital-light licensing agreement. The management team has noted furthering in-park hotel offerings, although something concrete has yet to be announced.

Financials and Valuation

Due to low international and group visitation numbers, SEAS is not at pre-COVID-19 operating numbers. However, it has increased total revenue per capita with in-park spending efforts and ticket pricing, which led to the record-breaking top and bottom-line results with revenues for FY21 at $1.503 billion, net income of $256.5 million and EBITDA of $603.5 million. Gross profit margin increased to 53.12% for FY21 from 46.98% in FY19. We can see that the inflationary market is impacting the margins with a lower TTM of 51.92%. Results show that the company could again end with a strong performance. These efforts become even more interesting as it operates at less than max capacity.

One of the red flags that stands out is the company’s high net debt. However, if we compare it to the peers in the market, we can see that high net debt is typical within the industry. The company has $109.57 million in cash, with low current and quick ratios of 0.64 and 0.44. However, it has a healthy covered ratio of 4.72, indicating that it can quickly meet current interest payment obligations.

The balance sheet liquidity of $479.9 million allows it to continue to grow and invest in the business while rewarding shareholders. It doesn’t have a dividend program; however, it has a frequent repurchasing program. Year to date, the company has repurchased $12.3 million in shares. Furthermore, it has a positive free cash flow of $119.6 million and $169.2 million cash from operations. Its CapEx spending was $49.7 million in Q3, of which $17.1 million was spent on expansion and ROI projects. Total expenditure for 2022 will be around $290 million in CapEx.

If we look at SEAS’s valuation compared to its peers, we can see that it has a price-to-earnings ratio of 13.24, which is lower than its most direct competitor, SIX, at 18.65. FUN is the most undervalued at 9.22. SEAS is rated by various analysts between Hold and Buy ratings, with Zacks Rank and SeekingAlpha’s Quant rating indicating a Hold rating of 3 and 3.1. At the same time, Yahoo Finance and Wallstreet analysts lean towards a Buy rating.

Risks

We have seen that the company has a high debt intake with low current and quick ratios. Although the company can sufficiently cover its interest payment obligations, it needs more quick assets if it were to have to meet its short-term obligations directly. This is something to be wary of in the case of performance interruptions. Furthermore, large amusement parks are impacted by the inflationary environment and staff shortages, which will continue to affect upcoming performances by raising expenses and reducing margins. Many macro-environmental factors are out of the control of the company. Weather is one such factor which can benefit or have a severely detrimental impact on its performance. The company indicated that Hurricane Ian resulted in 90,000 fewer visitors than expected in the prior quarter. Labour will also be a pressing issue if the parks start to reach higher capacity numbers, although SEAS is using its mobile app to create efficiencies such as online restaurant orders.

Final thoughts

While we should remain cautious of the company’s high debt intake and low liquidity ratios, SEAS has an attractive price-to-earnings ratio of 13.24 and is benefiting from pent-up demand in a growing amusement park industry, which is expected to grow at 6.14% to reach $77.7 billion by 2027. Furthermore, it has invested in developing and updating park facilities and will open the world’s largest aquarium later this year in Abu Dhabi. For this reason, the stock warrants a bullish stance.