May 11, 2016 12:25 p.m. ET
Shares of SeaWorld Entertainment Inc. SEAS, -3.04% fell 5% Wednesday after the stock was downgraded to underperform from outperform at Credit Suisse.
Credit Suisse analysts reversed their position on the stock due to competition from other theme parks, a lack of pricing power and an expected ‘lack of traction’ with SeaWorld’s turnaround thesis. SeaWorld has been shifting away from its orca and animal shows to animal sanctuaries after controversy on how the theme park treats the animals.
Shares of SeaWorld have fallen 16.5% month-to-date compared with the S&P 500’s gain of 0.6%. The analysts cut the price target to $15 from $27.
The analysts said SeaWorld’s stock is poised to drop farther as they feel the company’s lowered guidance doesn’t take into account increased competition from Walt Disney Co. DIS, -0.52% and Universal Studios CMCSA, -0.91% and its own inability to raise prices.
“Despite the recently lowered 2016 guidance, we feel this call is not too late and still see 18% potential downside to shares,” the analysts wrote.
They add that the investors who are still bullish on the stock may just be trading on hope.
The increased pressure on SeaWorld comes with the planned attractions of King Kong at Universal Orlando and a Frozen attraction at Disney in Orlando. SeaWorld has already been hurt by Universal’s introduction of Harry Potter World, which opened in Orlando in 2014 and cost SeaWorld $250,000 to $300,000 in lost revenue in 2014, according to analyst estimates.
Competition is expected to cost SeaWorld $325,000 to $600,000 in lost revenue this year and will hamper its ability to increase ticket prices, with analysts estimating that long-term pricing will grow less than 3%.
SeaWorld may also have to offer discounts as it transitions from its legacy orca shows to natural orca encounters and adds more traditional rides. The company has said Orca shows will be phased out in 2017 in San Diego.
And with the turnaround taking an estimated 12 to 24 months, the analysts see the stock continuing to get hit.
“While we agree with [management]’s decision to invest more heavily in non-animal centric attractions (this was part of our original bull thesis) for now the level/speed of investment will be overshadowed by peers,” the analysts wrote.