Strengths
Brands and experiences: SeaWorld Entertainment Inc (NYSE:SEAS) owns great names such as Adventure Island, SeaWorld, Aquatica, and Discovery Cove. It also licenses well-known names such as Sesame Street and Busch Gardens.
In addition, you may recall some aesthetic qualities surrounding some of the theme parks. According to its prospectus, SeaWorld’s theme parks won awards for park beauty and layout. SeaWorld also provides interactive experiences with animals throughout its parks.
Experienced CEO: As a shareholder or prospective shareholder you would want an experienced management team with intimate knowledge of the business. SeaWorld Entertainment Inc (NYSE:SEAS)’s CEO James D. Atchison started out as a parking lot attendant nearly 30 years ago and worked his way up to his current position of Chief Executive Officer, according to a New York Times article. This represents 30 years of inside knowledge, experience and relationships that will serve shareholders well.
Weaknesses
Lack of diversity: While SeaWorld provides diversity in the form of different theme parks, it lacks the multiple channels and the resources of The Walt Disney Company (NYSE:DIS) or Comcast Corporation (NASDAQ:CMCSA).
The Walt Disney Company (NYSE:DIS), through its Marvel, Pixar and Lucasfilm subsidiaries, owns a vast universe of fictional characters which it can turn into movies, televisions shows, comic books, theme park rides and theme cruise ships. Its creative staff can also create new characters providing more potential for brand building.
Comcast Corporation (NASDAQ:CMCSA) also owns and licenses a number of iconic brands and characters for use in its Universal theme park division, giving it some diversity as well.
Cash: SeaWorld Entertainment Inc (NYSE:SEAS) only possesses $46 million on its balance sheet, representing a mere 10% of its stockholder’s equity. This resulted from a more than $600 million dividend payment to its controlling shareholder The Blackstone Group L.P. (NYSE:BX) over the past couple of years. This could prove problematic in paying SeaWorld’s massive interest payment, which is highlighted in threats, as well as other extra expenses.
Opportunities
Media: In 2013, SeaWorld intends to introduce a new character called Puck the Penguin upon which SeaWorld will feature a theme park, merchandise, and games. It also launched a Saturday morning cartoon called Sea Rescue airing on ABC in 2012.
International expansion: SeaWorld Entertainment Inc (NYSE:SEAS)’s CEO James Atchison wants to bring the company’s brands to markets outside the U.S.
Threats
Debt: As you can see in the table below, at the end of 2012, SeaWorld’s long term debt to equity ratio stands at a whopping 401% — far exceeding my personal threshold of 50%. Its times interest earned — defined as operating income divided by interest expense — equates to just two, similar to theme park competitor Cedar Fair, L.P. (NYSE:FUN). In other words, its operating profit only exceeds interest expense by two times. The general rule of thumb for most companies requires five times interest earned. This should be a deal breaker for prospective shareholders. SeaWorld sits on debt with variable interest rates attached to it which means interest payments will raise if the Fed decides to increase rates from historical lows.
In contrast, Disney’s operating income exceeds its interest expenses by 24 times, giving it a great margin of safety when it comes to meeting its interest obligations. Six Flags Entertainment Corp (NYSE:SIX) and Universal stand in the middle with 4 and 6 times interest earned, respectively.
In addition, you should also worry about how SeaWorld will make its promised $0.20 per share per quarter dividend payment.
SeaWorld also sports the lowest free cash flow margin. Cedar Fair’s free cash flow margin tells you it possesses a greater ability to convert revenue into cash giving a slightly greater ability to make its interest payments.
| Company* | Operating margins FY 2012 | Free cash flow margins FY 2012 | Return on equity FY 2012 | Long-term debt to equity FY 2012 | Times interest earned FY 2012 | Revenue growth FY 2012 | P/E Ratio FY 2012** |
|---|---|---|---|---|---|---|---|
| Seaworld | 16% | 8% | 17% | 401% | 2 | 7% | 35 |
| Cedar Fair | 22% | 18% | 64% | 962% | 2 | 4% | 23 |
| Disney | 21% | 10% | 15% | 25% | 24 | 3% | 20 |
| Six Flags | 19% | 26% | 40% | 156% | 4 | 6% | 12 |
| Comcast’s NBC Universal | 12% | 10% | 9% | 35% | 6 | 25% | 18 |
Compiled from SEC filings and Yahoo! Finance. *Full year 2012 figures. **As of this writing.
Conclusion
What does the future hold for SeaWorld and its shareholders? The future could be a dismal one if interest rates rise or if SeaWorld experiences a sudden unexpected drop in cash flow. Your money will be better served visiting SeaWorld rather than investing in it.
The article Is this Theme Park Worth a Look? originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
