When you evaluate a publicly-traded business, it’s important to research the risks associated with it. Theme park SeaWorld Entertainment Inc (NYSE:SEAS) released the final version of its prospectus form 424B4 on the day before its initial public offering (IPO). In the risk section, you can find five risks that hint at the possibility that the 24% run up in stock price on Seaworld’s first day of trading may not last.
“Incidents or adverse publicity concerning our theme parks or the theme park industry generally could harm our brands or reputation as well as negatively impact our revenues and profitability.” – Prospectus, page 19
Anytime a business gets involved with large and exotic animals, the risk of injury or death of employees, customers, or suppliers always exists. When this happens, it spurs negative media coverage and causes customers to harbor second thoughts about attending parks such as Seaworld.
In 2010, an Orca whale killed a trainer in full view of visitors, according to a New York Times article. In the summer of 2013, you will see the release of a documentary called “Blackfish,” which details the death of a trainer.
“Because we operate in a highly competitive industry, our revenue, profits or market share could be harmed if we are unable to compete effectively.” -Prospectus, page 21
No doubt SeaWorld Entertainment Inc (NYSE:SEAS) operates in a market with many players, competing with other “pure” theme-park companies such as Cedar Fair, L.P. (NYSE:FUN) and Six Flags Entertainment Corp (NYSE:SIX), as well as subsidiaries of entertainment conglomerates such as The Walt Disney Company (NYSE:DIS) and Comcast Corporation (NASDAQ:CMCSA).
Likewise, your biggest concern should lie in Seaworld’s miniscule cash balance of $45 million (table below). The $64 billion question: how can Seaworld effectively compete against entertainment conglomerates such as Disney, which possesses 133 times the amount of cash on its balance sheet, or Comcast Corporation (NASDAQ:CMCSA), which possesses 129 times the cash?
Building roller-coaster rides and building theme parks in general represents a capital-intensive exercise. With The Walt Disney Company (NYSE:DIS)’s deep pockets, it can develop new characters, acquire new iconic entertainment companies to add to its already strong portfolio and incorporate them into new theme park rides renewing consumer interest.
For example, Pixar plans to release the movie Planes, which will add to a vast universe that Disney can leverage into new roller-coaster rides, television shows and merchandise. The Walt Disney Company (NYSE:DIS) also plans to put Lucasfilm’s assets to work by producing a new Star Wars movie for release in 2015 on which it can base new theme-park rides, television shows, etc. Disney does not know the limits of exotic animals. Its diversity will contribute to superior shareholder returns for quite some time.