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Laudani: SeaWorld Shares Are All Wet

SeaWorld Entertainment (SEAS) reported on Wednesday a 13% drop in first quarter attendance at its theme parks. Attendance declined to 3.05 million from 3.5 million a year earlier.

Management blamed the drop on the shift in the Easter holiday. For the one-year period, the stock is underwater. Can you invest in SeaWorld without getting seasick?

SeaWorld owns and operates 11 parks in five states. SeaWorld cares for 86,000 animals, including approximately 8,000 marine and terrestrial animals and approximately 78,000 fish. SeaWorld has 29 killer whales, the largest group of the species under human care. More than 80% of their marine animals were born in human care.

The parks contain more than 600 rides and attractions. The company operates under the brand names SeaWorld, Busch Gardens, Aquatica, Discovery Cove and Sesame Place. Last year, 23.4 million guests visited SeaWorld. The company generated $1.46 billion in revenue and net income of $50.5 million.

The Blackstone Group (BX) bought the company from Anheuser-Bush InBev (BUD) in December 2009. Blackstone flipped SeaWorld to the public on April 24, 2013 at $27 per share. SeaWorld raised $245 million on the deal. The company used the money to pay off an 11% $140 million senior note and saw fit to kick back Blackstone a $46 million "advisory fee" for all its hard work.

In a filing Wednesday night with the Securities and Exchange Commission, Goldman Sachs and Morgan Stanley generously agreed to flag an additional 15 million shares to the public. The company will purchase 1.75 million of its shares from the Blackstone Group. After the offering, Blackstone will own approximately 25% of SeaWorld. Apparently the guys at Blackstone like the amusement park business. They also own Legoland.

After reading though the prospectus last night, I think investors should pass on this offering.

First, the company is highly leveraged. It entered 2014 with $1.64 billion in debt. Although debt payments have dropped from $134 million in 2010 to $93 million at the end of 2013, debt repayment is still a big expense.

Second, it's hard to see how SeaWorld will grow. After the company was acquired, SeaWorld started raising admission prices. Admission prices have gone from $34.91 in 2011, to $36.62 in 2012 and ended 2013 at $39.37. Admission is 63% of revenue. The company also jacked up food and merchandise prices as well.

Between 2010 and 2013, total revenue per person grew at a 5.4% annualized rate to $62.43. But, during the same period, attendance grew at an annualized rate of just 1.5%.

Other than raising prices, what's the plan to grow revenues?

Last May, SeaWorld opened a new attraction called "Antarctica: Empire of the Penguin" at SeaWorld Orlando. That enabled them to introduce a new character called "Puck" the penguin. That drove T-shirt sales. They added a wine and food show at Busch Gardens Williamsburg and a live singing and dancing show in Tampa and San Diego.

SeaWorld also added "Pets Ahoy" in San Antonio. Pets Ahoy features talented dogs, cats and potbelly pigs performing a series of entertaining skits. Although I haven't seen their act, I doubt a comedy act by a bunch of talented potbelly pigs is enough to drive top-line revenue. Updating the attractions is all standard stuff in the amusement business.

For fiscal 2014, analysts predict revenue will grow 3.7% and 4% next year. As the company reduces debt payments, net income is projected to soar 153% to $127.6 million. That will drive earnings per share, but Blackstone will keep reducing its stake. That will keep the pressure on earnings per share.

There will be a time to buy this stock, but it's not now. I'd rather not be on the receiving end of a Wall Street flip. When Blackstone is selling, you don't want to be buying. Investors who purchase shares in SeaWorld will be under the sea for a long time.

At the time of publication Laudani had no positions in any stocks mentioned.

  Christopher Laudani is the founder and president of ShortIdeas.com, a short-only equity research firm.

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