The Best Of The SeaWorld Turnaround Is Already Priced Into The Stock - SeaWorld Entertainment, Inc. (NYSE:SEAS)

SeaWorld has shaken off the hangover from the 2013 documentary Blackfish, and has returned to growth over the past 18 months.

Theme park operator SeaWorld (SEAS) has staged an impressive turnaround over the past 18 months as the company has successfully shaken off the hangover from the damaging 2013 documentary Blackfish - which hit this company hard and caused attendance, revenue, margins, profits, and the stock to drop in a big way. Throughout 2018, SeaWorld returned to growth, on all its important metrics from attendance to margins, and those metrics have remained healthy and positive to-date in 2019. As these metrics have turned around, so has SEAS stock, which has essentially tripled from its late 2017 low.

Unfortunately, we think the best of this SEAS recovery rally is over. To be sure, we think that SeaWorld is doing everything right, and that the company's growth trajectory will remain healthy for the foreseeable future. But, we also think that this healthy growth trajectory is already fully priced into SEAS stock. As such, we think that the best of the SEAS recovery has already come and gone, and don't believe in the chasing the rally up here at multi-year highs.

There are five big components to our thesis on SeaWorld:

Before 2013, SeaWorld was an ocean-focused theme park operator firing on all cylinders. From 2010 to 2012, attendance rose 9%, per capita spend rose 6%, revenues rose 19%, and adjusted EBITDA margins expanded in a big way.

Then, the documentary Blackfishcame out in 2013, and that highly publicized and widely watched documentary shone an unfavorable light on the dark underbelly of animal conditions at SeaWorld parks. Consumers were distraught. They stopped going to SeaWorld parks. In 2013, attendance dropped more than 4%. Consumers also didn't forget the documentary quickly. Over the next several years, traffic trends remained adverse. From 2012 to 2017, attendance declined nearly 15%. The hit on revenues and profits materialized in 2014, and from 2014 to 2017, revenues dropped over 13%, adjusted EBITDA margins compressed more than 650 basis points, and adjusted EBITDA fell more than 30%.

In response to all those pressures, SEAS stock shed more than 70% of its value between mid-2013 and late 2017.

Consumers apparently started forgetting about the Blackfishdocumentary around 18 months ago. Throughout 2018, SeaWorld returned to growth. All four quarters in 2018 comprised 5% or greater revenue growth, 5% or greater attendance growth, and 200 basis points or more of adjusted EBITDA margin expansion. For the full year 2018, revenues and attendance both rose around 8.5%, while adjusted EBITDA margins expanded over 500 basis points.

This growth has continued in 2019. First quarter 2019 results comprised positive revenue growth, positive attendance growth, and substantial margin expansion. In response to this operational rebound, SEAS stock has rebounded, too, rallying over 200% from late 2017 to present.

This rebound in the SeaWorld growth trajectory makes sense, and steady growth going forward should remain the trend.

In the big picture, the 2014-17 performance was an anomaly brought on by a one-time catalyst that will not repeat going forward. In this lens, the rebound in 2018-19 was bound to happen, and is simply a return to the company's long term growth trend. Further, growth at SeaWorld is supported by the secular shift in the consumer economy towards experience-focused spend. Personal consumption expenditures on experience-focused services (defined as recreation and food services, accommodations, air travel, water travel, and foreign travel by U.S. residents) has consistently outpaced personal consumption expenditures on goods and other services for the past several years. This outpacing implies that consumers are increasingly spending big on experiences. Theme parks are experiences, and SeaWorld is a unique theme park with a unique experience. As such, this secular consumption tailwind implies that SeaWorld should remain on a steady growth trend for the foreseeable future.

That's why analysts see revenue growth being steady and positive over the next several years, and why management sees margins continuing to expand (they are targeting $475 to $500 million in adjusted EBITDA by 2020). Broadly, then, it appears that SeaWorld's recent operational strength, will persist for the foreseeable future.

The only problem with SEAS stock is that, given its massive 200% rally over the past ~18 months, the stock is already fully priced for steady growth over the next several years.

Revenue growth last quarter was just under 2%. PCE spend on recreation services (of which parks is a major category) has grown at a 4% compounded annual growth rate since 2010. Given that there is still some negative stigma surrounding SeaWorld parks but that SeaWorld is gradually shaking off that stigma, it is likely that SeaWorld's revenue growth rate over the next several years hovers somewhere between 2% and 4%.

Given consensus revenue estimates for 2020 ($1.47 billion) and management's target for $475 to $500 million in adjusted EBITDA by 2020, then the adjusted EBITDA margin is expected to be about 33% in 2020, versus roughly 30% in 2018. Given that growth ramp, it is reasonable to assume that adjusted EBITDA margins march towards 35% by 2025.

Under the assumption that this is a 2-4% revenue grower with room to expand EBITDA margins to 35% by 2025, we believe that SeaWorld has the potential to net EPS of $2.50 by 2025. Peer theme park operators trade anywhere between 15x and 19x forward earnings. SeaWorld could probably justify a 20x forward multiple at scale, given healthy growth prospects. Still, a 20x forward multiple on $2.50 in 2025 EPS yields a 2024 price target of $50, which when discounted back by 10% per year, yields a 2019 price target of $31, below the current SEAS stock price.

At the end of the day, we are fans of the SeaWorld turnaround, and believe it will persist for the foreseeable future. But, we also think that most of this operational turnaround is already priced into SEAS stock, and that further near to medium term upside in the stock is capped by an already stretched valuation.

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.

Source: Seekingalpha.com

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