Turnaround Letter Buy-recommended SeaWorld Entertainment (NYSE: SEAS) reported a strong fourth quarter and maintained its targets for 2020 EBITDA. The turnaround is working, with a recently appointed CEO who looks well-qualified to help the company complete its recovery. SeaWorld shares, which have gained 20% since our initial recommendation, remain BUY-rated with a $35 price target.
SeaWorld reported a surprisingly strong Adjusted EBITDA1 of $64.6 million, which was 33% higher than Adjusted EBITDA of $48.4 million a year ago. The results were 15% higher than consensus estimates.
Much of the $16.2 million increase in profits came from the $14.5 million increase in revenues. Park attendance increased by 8%, which was partly offset by 5.6% lower average prices. SeaWorld continues to tweak its pricing by offering a variety of packages and season passes at attractive prices to bring in more customers. Once in the park, customers are increasing their spending, which rose by about 2.7% in the fourth quarter compared to a year ago.
Additional profits were produced from better operating efficiency. Cash operating expenses actually fell by about $2 million despite the higher revenues.
SeaWorld’s reported net income2, which follow GAAP accounting rules, and adjusted net income (which includes adjustments to GAAP numbers), continue to show a loss, although a smaller loss than a year ago.
Shares jump on the news
SEAS shares jumped 8% on the announcement day (February 28) and remain modestly higher than the pre-release price. Year-to-date, SEAS shares are up 17%.
SeaWorld’s turnaround is working
Management reiterated their 2020 Adjusted EBITDA target of $475 million to $500 million. This appears to be within reach based on their results in 2018 and likely continued improvements in 2019 and 2020. The company recently refinanced much of its debt, extending the maturities and eliminating most of the restrictive covenants. These steps help extend its turnaround runway. Its debt is about 3.6x EBITDA – reasonable but we would like to see this reduced to about 2.5-3.0x.
The new CEO (announced February 5th), Gus Antorcha, previously the Chief Operating Officer at Carnival Cruise Lines, is a respected and capable operator and executive. He will bring Carnival’s disciplined execution as well as its demand generation, pricing and marketing expertise to SeaWorld.
SeaWorld is generating positive free cash flow after capital spending. After several years of heavy catch-up spending to update and improve its offering of rides and attractions, which have helped generate attendance, the company is now able to modestly reduce its capital outlays to a more sustainable $150 million/year. SeaWorld repurchased about $98 million of its shares in the fourth quarter and increased the remaining authorization to $250 million.
The company’s efforts to improve its reputation regarding its treatment of animals seems to be making progress. Not only is it expanding its animal rescue efforts and shifting its parks’ emphasis away from purely entertaining animal shows, it is boosting its marketing to highlight these newer priorities. Importantly, this change appears to be permanent and of substance. Still, this remains an issue, with the surprising January 2019 death of orca Kayla as a reminder.
Overall, the turnaround is working. There is still much work ahead. To reach our price target, the company needs to generate another $130 million-150 million in revenues and another $75 million in Adjusted EBITDA (for an incremental margin of about 50%) in two years. We believe this is achievable. SeaWorld needs to redirect some of its upcoming surplus cash flow to debt repayment. It also needs to continue to improve its reputation, which would help boost its EBITDA multiple from the current 8.7x to the targeted 10x.
Importantly, SeaWorld is a seasonal business. Also, Easter (an important traffic weekend), is in the second quarter this year whereas it straddled the first and second quarters (on April 1st) last year. So, we expect some volatility around earnings reports, seasonal trends and other newsflow.
We continue to recommend SeaWorld shares as a BUY.
- Earnings before interest, taxes, depreciation and amortization, which is a measure of cash operating profits.
- GAAP, or Generally Accepted Accounting Principles, requires the company to follow independently defined and verified reporting rules.
We continue to rate shares of SeaWorld Entertainment (SEAS) a BUY with a $35 price target.
Disclosure Note: An employee of the Publisher owns SEAS shares.