April 15, 2016
SeaWorld made a massive move by ending the breeding of their signature orcas in March. But from a business perspective, they’re not out of the woods yet.
According to Jason Bazinet at Citi, despite the revenue increases expected from the image upgrade, the theme park purveyor still hasa lot of issues to deal with.
These problems, along with the now-rich valuation, should keep investors away from the stock.
“In effect, adverse Orlando trends could offset the benefits of the firm’s strategic pivot,” said a Friday note from Bazinet. “And, in parallel, the Street has already rewarded SeaWorld’s equity. Recall, since the orca announcement, SeaWorld’s equity is up ~25%. As such, we no longer like the risk-reward and are moving to the sidelines.”
The move, however, also negates some of the potential gain. For instance, the shift makes SeaWorld simply a regional park, a la Six Flags, instead of a destination attraction according to Bazinet. This means that while visitors and revenue may increase from locals, the company will have fewer international and long-distance visitors.
“But, we want to assess this: If management pivots from an orca centric tourist park to a regional park, then the number of resident visitors should rise,” wrote Bazinet. “But, the number of international and out-of-state visitors should fall. The key is to understand the trade-off.”
In the end this trade-off will be a revenue-driver for the parks, wrote Bazinet, but the transition will not be without growing pains.
Looking at Orlando airport trends and the attendance figures after the release of the documentary Blackfish, which is widely credited with the beginning of SeaWorld’s decline, the picture does not look bright.
We believe a 10% decrease in Orlando’s attendance is possible (even assuming no share loss). And, if we assume the historical share loss, SeaWorld Orlando could see attendance declines of ~15-20%. If we assume a 10% decline in SeaWorld Orlando attendance, it would reduce revenues by ~$38 million, EBITDA by ~$28 million, FCF by ~$18 million, and total equity value by ~$3.
And the shift to a regional park is not the only problem. SeaWorld and Universal Studios used to gain visitors as attendance at the Disney theme parks rose. The thought being, that people on vacation would opt to spend some time at a non-Disney park for a portion of their trip. Recently, however, all of the spillover has gone to Universal instead of SeaWorld.
Some of the shift to Universal has been due to the “Blackfish” scandal, but some is also due to a massive wave of investment by Universal into their park.
“We believe this suggests that guests are electing to spend part of their Disney vacation at Universal rather than SeaWorld,” said the note. “This is likely driven by higher capital investments at Universal.”
Simply put, investments such as the Wizarding World of Harry Potter are driving traffic away from SeaWorld, and to Universal.
So between the transition to a non-international visitors and Universal Studios gobbling up market share, SeaWorld is facing a tough few years even with the new transition.