SeaWorld Entertainment (SEAS) has seen its share price go on a rollercoaster of its own this year. Shares have rallied sharply, only to plummet, and then repeat that cycle over and over. The stock is on a hot streak at the moment, however, as we can see below.
Two months ago, I called SeaWorld a buy given that it looked like investors had priced in too much bad news. Shares are up a sweltering 43% since my buy call, so it has worked out nicely. However, at this point, I’m moving to a neutral stance as I don’t see anything near the value proposition I did a couple of months ago. And, of course, the stock is already up 43%, so some profit-taking is likely in order.
Adding to my cautiousness is SeaWorld’s relative strength against its peer group, as well as the peer group’s strength against the broader market, the latter of which is plotted below.
We can see that, unsurprisingly, the recreational services index has been extremely weak this year. There has been a bit of relative strength in August because of vaccine hopes, emergency treatments, and general reopenings across a wide variety of geographies and industries. However, it is just a blip in the trailing-twelve-months chart and the group remains quite weak and risky.
In addition to that, SeaWorld has already vastly outperformed its peer group of late, which we can see below.
The stock has soared against the group since the April bottom, and recently hit the same level of relative strength where it turned lower twice before. While past performance does not guarantee future results, I think ignoring this is imprudent. There is nothing saying SeaWorld has to now underperform its peer group, but there is certainly some evidence to suggest that is possible.
If that occurs, and given what we know about the immense weakness seen from the recreational services index in the past year, that’s not a good combination.
Reopening looks tenuous
SeaWorld reported second quarter earnings a couple of weeks ago, and obviously, results were terrible. The company’s parks had only 98 operating days – at reduced capacity – compared to 861 operating days in the same quarter last year. SeaWorld’s parks began reopening very slowly and carefully very late in the quarter, so Q3 results should be better.
However, revenue will still be down from nearly $500 million in last year’s Q3 to about $100 million.
Source: Seeking Alpha
The third quarter is generally SeaWorld’s biggest in terms of revenue and earnings, so having its parks shut down or operating at extremely small capacity is all the more painful. Q4 should see another enormous drop in revenue, and while the comparables for 2021 will be easier, the absolute numbers the company can generate based upon its current reopening schedule will still be very small, in all likelihood.
To be honest, I thought SeaWorld would be more aggressive with its reopening timelines, but that just hasn’t come to fruition. The company touted improving attendance trends from reopenings in June to the last week of July, but the gains were small and off of very low bases. In addition, SeaWorld noted its Discovery Cove attraction is taking strong booking volumes into 2021, but the cruise lines have been reporting the same sort of thing, and remain closed. While SeaWorld is trying, its very cautious reopening schedule may end up exacerbating the pain.
SeaWorld has always had a lot of debt, which is normal for a capex-heavy business. However, recent cash burn rates and general uncertainty have also caused the company’s financing situation to deteriorate. In April, it borrowed $227.5 million at 8.75%. In early August, it borrowed $500 million at 9.5%. These are incredibly expensive sources of cash and while the company is simply doing what is necessary to survive, the hurdle rate for new investments is creeping ever higher with these financing moves. The upside is that SeaWorld has plenty of cash to weather this storm, but I’m increasingly concerned about what its earnings will look like after the crisis has passed, in addition to how much balance flexibility it may have.
As of August 10th, nine of the company’s twelve parks were open, but with capacity limitations, reduced hours of operation, and or limited operating days. With summer almost over, SeaWorld has missed the prime parts of the year, so a recovery is getting further and further off into the horizon.
A much fuller valuation
When I wrote my bullish piece on SeaWorld a couple of months ago, the stock was trading for less than 13 times 2022 earnings. Today, that number is 17.
Source: Seeking Alpha
In addition, I assessed fair value at 18 or 19 times earnings back in June, so we are bumping right up against that today on earnings that won’t take place for a couple of years. Given the slow reopenings and limited success SeaWorld has seen thus far, I’d also suggest that the risk of achieving these estimates has risen since I called SeaWorld cheap.
Given all of this, I think taking profits in SeaWorld shares is prudent. We have what I perceive to be a slower-than-expected reopening, with rollercoasters closed and very little marketing spending, in addition to a valuation that is quite close to where I assess fair value. I certainly won’t short SeaWorld at these levels, but I am turning from bullish to neutral, and I think taking proceeds is the correct course of action today.
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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.