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Six Flags Entertainment Corp (SIX), Cedar Fair, L.P. (FUN), SeaWorld Entertainment Inc (SEAS): Don’t Jump on This Just Yet

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Like any normal hotly anticipate IPO, theme park owner SeaWorld Entertainment Inc (NYSE:SEAS) surged in its first day of trading, closing up 24% even after pricing at the high end of its IPO range.

At a price of $33.5 a share, the company trades on a ttm P/E of 36 and a price to book ratio of 5.5, even though the company has made a loss in two out of the last four years and has been cash flow positive in only one.

As a value investor, these numbers certainly do not look appealing. Furthermore, the company has some questionable key ratios:

Values taken from the company’s S-1 filed April 11

Metric Value
Current Assets $152
Current Liabilities $246
Current Ratio 0.6

Figures in millions of $US

With a current ratio of less than one, the company has extremely poor liquidity and lacks the ability to cover all of its bills falling due within twelve months. Usually, this would not be an issue, as it would be easy for the company to increase its short-term borrowing to pay for any sudden liabilities called in, however, the company already has questionable levels of debt.

Metric Value
Net Debt $1,800
Net Debt to EBITDA 3.5x
Net Debt to Equity 4.1x

Figures in millions of $US

And interest costs already account for 50% of operating income:

Metric Value
Interest Expense $111
Operating Income $227
Interest Cover 2.04x

Figures in millions of $US

With a net debt to equity ratio of 4.1x and interest coverage of only 2x, the company does not have much room to move financially. Indeed, even a small reduction in net income could significantly affect the company’s ability to service its debt, and if the company increased its debt to cover current liabilities, the higher interest payments would put the company’s income under further pressure.

It appears that SeaWorld Entertainment Inc (NYSE:SEAS) could quickly slip into trouble if its income starts to come under pressure.

Having said that, are these levels of debt and low current ratios universal across the industry? How does SeaWorld Entertainment Inc (NYSE:SEAS) compare to its competitors?

The competition

The company’s closest competitors/peers would be Six Flags Entertainment Corp (NYSE:SIX) and Cedar Fair, L.P. (NYSE:FUN) (Disney is also fairly active in the sector but is much more diversified and has global exposure – not really a suitable comparison.)

Company Market Cap. P/E ttm P/B Current Ratio Debt to Equity Interest Cover Liabilities and Shareholder Equity
Six Flags $3.5B 11.7 4.3 4.2 1.57 5.4 $3.06B
Cedar Fair $2.3B 16.3 14.6 1 9.6 2.3 $2.03B
SeaWorld $3.1B 36 5.5 0.6 4.1 2.0 $2.55B
Average 21.3 8 1.9 5.1 3.2 $2.55B

The largest and financially strongest company in this group is Six Flags Entertainment Corp (NYSE:SIX). Comparing Six Flags Entertainment Corp (NYSE:SIX) and SeaWorld really flags up SeaWorld’s weaknesses.

Six Flags Entertainment Corp (NYSE:SIX) has the lowest level of debt in the group, and current liabilities are covered more than four times by current assets. In addition, the company’s interest payments are covered five-and-a-half times by net income, and it is only trading on a ttm P/E of 11.7, below the group average of 21.3.

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