2023-04-13 13:49:12 ET
Summary
- The travel costs index suggests that US travel is more expensive than Switzerland and twice that of Greece. We know we have lots of choices for the next trip.
- The company was buying the stock, but the management was not.
- The valuation multiple seems to be quite attractive. However, we do not believe it is cheap enough.
Investment Thesis
We better understand if the stock is a buy or sell when we are forward-looking. We need to put ourselves in the shoe of the management to think about the business. We need to ask if we are willing to take out our credit cards to take debt to buy the product or service for the family. As a result, we will know what to vote on in the board meeting if we are shareholders of the company.
Since the majority of the company's sales were generated in the United States, inflation and a labor shortage posed a serious challenge. U.S. travel costs surged and ranked towards the top globally. In this scenario, we believe the company's decision to spend aggressively is risky.
In comparison to its peers, the valuation multiple seemed to be quite attractive. However, we do not believe it is cheap enough to acquire a sizable position at this level because the downside from the potential recession risk likely outweighs the upside. We advise that investors should hold off until the price goes lower.
Company Profile
SeaWorld Entertainment, Inc. (SEAS) is a leading theme park and entertainment company. It owns or licenses a portfolio of recognized brands including SeaWorld, Busch Gardens, Aquatica, Discovery Cove, and Sesame Place. It has developed a diversified portfolio of 12 differentiated theme parks that are grouped in key markets across the United States.
The company generates revenue primarily from selling admission to its theme parks and from purchases of food, merchandise, and other items, primarily within its theme parks.
It generated $1.7 billion in revenues and $507 million in operating income in 2022.
Key Takeaways from Q42022 Earnings:
We have the following comments:
Its revenues increased by 5.3%, decelerating from 8.4% in Q3 2022, driven by lower attendance. Its adjusted EBITDA margin decreased by 220 bps, driven by a shortage in staff and deleverage of consumer traffic. The company was able to maintain topline growth by price adjustment but its profits faced significant pressure from inflation.
Growth Drivers
The management mentioned in the earnings calls that it focused on the new international theme park and the existing park upgrade. The company's CapEx plans for 2023 will be in the range of $250 million to $300 million, higher than Capex in 2022.
Also in 2022, we partnered with a host of other organizations to expand our care and protection for aquatic life to include integrated support of the Florida Coral Rescue Center in the ongoing rescue work on the Florida coral reef. Also, a few weeks ago, SeaWorld's first rescue center outside of the U.S., in Abu Dhabi opened. Yas Research -- Yas SeaWorld Research and Rescue located at Yas Island in Abu Dhabi is the first dedicated marine research and rescue center in the Middle East, North Africa region and will be a key contributor to marine-life conservation in both the UAE and the wider Middle East, North Africa region. I'm really proud of the team's hard work and their continued dedication to these important rescue efforts. I want to thank them and all our ambassadors for all they do to operate our parks in this current environment. We are certainly excited about 2023. We are on track to open all of our 2023 new rides and attractions in the coming weeks and months.
So again, I'd reference you back to Jim's comments that we said the core would be $150 million to $180 million. And again, that's going to be your new rides, your attractions and things like that in the park. And then we said for 2023, the ROI would be $100 million to $120 million to get us to the $250 million to $300 million. Again, that second bucket is -- I would not think of that as like permanent in nature. It's going to be dependent on what type of ROI opportunities we have.
We think that international expansion can increase its global reach and increase its brand awareness. The costs associated with the new rides upgrades may lead to an increase in the ticket price, which could result in lower consumer traffic.
Industry
According to the company , the industry is currently facing challenges related to staffing and attendance levels. The labor market is experiencing wage inflationary pressures, COVID-19-related factors, and a challenging operating environment.
The current condition of the overall labor market, including wage inflationary pressures, the challenging current operating environment and COVID-19 related factors has led to increased turnover throughout the company and challenges in meeting our staffing goals. These staffing challenges have also led to wage pressures and less than optimal staffing levels, which have impacted and could continue to impact our ability to open some of our food and beverage and retail outlets, caused us to temporarily close some rides or attractions, and/or caused longer wait times in certain areas of our parks, which has and could continue to impact the guest experience.
Our attendance levels for fiscal 2022 were below levels achieved in 2019, primarily due to a decline in both international and group-related attendance, which we expect will eventually recover to and surpass pre-COVID levels.
According to the U.S. travel association , overseas visitations remain significantly below 2019 levels, with February visitations being 31% below 2019 levels. While there has been an improvement from January's 33% decline, overseas visitations still have a long way to go to recover to pre-COVID levels.
Travel spending totaled $93 billion in February -5% above 2019 levels and 9% above 2022 levels.
Leisure travel demand does not appear to be abating with America's excitement to travel at record highs and more than half (55%) planning to prioritize leisure travel spending .
Overseas visitations were 31% below 2019 levels in February , an improvement from 33% in January, but still far behind.
Travel from Mexico slipped from -30% in November to -37% in December (latest available), while travel from Canada reached a new high of 15% above pre-pandemic levels in January 2023 (latest available).
According to Budgetyourtrip , Unites States ranked top globally by average daily travel price, per person, per day. This makes domestic travel less appealing to domestic residents as well.
The following travel cost rankings for countries in Europe are calculated based on the travel budgets of real travelers. Also referred to as a Travel Cost Index, or a Backpacker Index, the countries below are in order from most to least expensive by their average daily travel price, per person, per day
Valuation and Catalysts
Its valuation multiples are cheap compared to its 5-year average and relatively cheap to its sector median.
Compared to peers categorized by Seeking Alpha, its P/E ratio and P/Cash Flow ratio are relatively lower than the peers.
DCF valuation
We make the following assumptions based on the company's financials and current market conditions:
- No growth in 2023
- 20% WACC
- 3% terminal growth rate
- 21% free cash flow margin (2022)
- Net debt 2058 million (Q4 2022)
- Outstanding shares 64 million (Q4 2022)
Applying the DCF method, we can arrive at an equity value of $141 million ($2.2 per share), which implies a 96% decline from the current stock price.
With the sensitivity test below, we can see that the stock is undervalued only if its free cash flow margin increases above 25% or WACC drops below 10%.
The stock was expensive in the DCF model due to its high debt level.
Catalysts
Shares buybacks
The company spent $693 million and $215 million to repurchase its shares in 2022 and 2021. However, we did not see any material purchase from the insiders. The current credit agreement has restrictions to issue new debt. The company can only use the funds from operations to repurchase shares. Hence, the huge buyback is not sustainable.
In addition, the Senior Secured Credit Facilities require the Company to prepay outstanding term loan borrowings, subject to certain exceptions, with:
100% of the net cash proceeds of any issuance or incurrence of debt, other than proceeds from debt permitted under the Senior Secured Credit Facilities.
Drop in WACC
A rate cut by the Fed or a drop in the treasury yield as a result of a recession can potentially cause the WACC to decrease. In several of our analyses using the discounted cash flow ((DCF)) model, such as our report on Warby Parker Progresses At A Consistent Pace , we have found that certain stocks can benefit from economic recessions. In particular, companies that have shown resilience to economic downturns or are in the early stages of growth may experience a boost in their stock prices, as long as they can sustain their operations. This is because a lower WACC means the costs of capital for these companies are lower. If the company can sustain its operation, the market is comfortable to support the company with funding.
However, we think the theme park industry can suffer significantly from the recession due to consumers cutting discretionary spending. Thus, we don't see recession as a catalyst for the stock.
Risks
Liquidity risk
The company has a current ratio of 0.6x and a cash ratio of 0.19x. The company only had $79 million cash on hand. Hence it is highly reliable on the funds from the operation and liquidity support from its banks. The company has $371 million available in its revolving credit facility.
The company is projected to spend $250-$300 million in CAPEX and has a financial covenant to restrict its leverage.
The Debt Agreements permit an unlimited capacity for restricted payments if the net total leverage ratio on a pro forma basis does not exceed 4.25 to 1.00 after giving effect to the payment of any such restricted payment. As of December 31, 2022, the net total leverage ratio as calculated under the Debt Agreements was 2.78 to 1.00.
We think the company is quite aggressive in playing offense in 2023. The good news is that the company has a good track record in cutting expenses. The company was able to cut 1/3 of its operating expenses during the COVID crisis.
Summary
Since the majority of the company's sales were generated in the United States, inflation and a labor shortage posed a serious challenge. In this scenario, we believe the company's decision to spend impulsively is risky. In comparison to its peers, the valuation multiple seemed to be quite attractive. We do not believe it is cheap enough to acquire a sizable position at this level because the U.S. travel industry is susceptible to recession risk and may soon see stronger headwinds. We advise that investors should hold off until the price goes lower.
For further details see:
SeaWorld Confronts An Inflation Monster