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Investors hoping to make a big splash with SEAS may be disappointed

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March 11, 2015 – Comments (0) | RELATED TICKERS: SEAS , SIX , FUN

 

I love arcades and amusement parks.  My wife thinks that I'm a giant kid.  My family and I have probably been to every single water park, amusement park and major arcade on the East Coast and many across the country at some point.  These places are fun and life is too short not to have fun.

So when the stock of the company that owns several amusement parks that I've been to and enjoyed, SeaWorld, Busch Gardens and heck even Sesame Place when my kids were really little, and went on sale I was naturally interested.

 

A number of bullish articles have been published about SeaWorld (SEAS) since its stock took a beating, including one on SA a couple of days ago:

2015 Will Be A Comeback Year For SeaWorld  

http://seekingalpha.com/article/2986496-2015-will-be-a-comeback-year-for-seaworld

As I have been saying all week, I love stocks that have been crushed and from the looks of this chart SEAS definitely qualifies. 

 

A two-year chart of SEAS (blue) vs. the S&P 500 (red)

SeaWorld's stock is definitely cheaper than when its former (and current since they still hold a decent chunk that they haven't been able to unload yet) private equity owners loaded it up with debt and brought the company public early last year, BUT is it cheap enough to be an attractive investment at this point?

Try as I might to like the stock, it still seems way too expensive for my taste.  This situation is similar to another stock which has taken a beating lately, yet still is not cheap enough for me to sink real money into, Lumber Liquidators (LL). Both companies sold off and sustained massive reputational damage as a result of reports about their wrongdoing.  The question is not whether SeaWorld the company will eventually be able to recover from all of the negative press that the documentary Blackfish created for it.  I think that there is a reasonable chance that it can.  The question is...is SEAS the stock cheap enough to compensate investors for the potential risk that it may never recover completely.  I personally do not think that it is.

I am willing buy into something that has risk like this, it has to be super cheap.  SEAS is not.  I don't understand what valuation metric people who are bullish on the company are using in their analysis of it.  Superficially looking at a few stats for the company, like how it has $1.6 billion in debt, trades for over 30x earnings and has only a 4.5% dividend yield it does not seem tremendously cheap. Perhaps there is some other metric that people who own this stock are using to justify purchasing it?  If so, I'd love to hear it.

Some people believe that SEAS' 4.5% dividend yield is high.  I suppose that yields are all relative.  Is a 4.5% dividend yield is high compared to Treasuries or the negative rates of the Euro Zone? Absolutely. However, it's not high compared to the type distressed investment situations that I personally look for or even SEAS competitors. It's the same exact yield as Six Flags (SIX), which has performed better and faces much less uncertainty than SEAS

A one-year chart of SIX (blue) vs. the S&P 500 (red) 

and a lower yield than Cedar Fair (FUN) which is a much better-run company.

A year-year chart of FUN (blue) vs. the S&P 500 (red) 

Quite frankly, none of the companies in the sector have exactly lit the world on fire over the past several years. Coming out of ther Great Recession (TM) when everyone thought that people would never be able to afford to have fun again was the time to buy these stocks.  The easy money has already been made in the sector.

While I don't have the history in front of me, the P/E multiple of SEAS right now is probably not that far off from what it was when SEAS went public. The company has never been very attractive from an earnings multiple perspective. Sure, one could argue that earnings are temporarily depressed by the negative publicity, but one could just as easily argue that SEAS' capital spending gong forward is going to have to be much higher to bring back customers and improve its facilities to appease activists.

I'm just not seeing the value here. Is SEAS cheaper than it used to be? Absolutely. Do I like to visit it's parks with my family? Yes. Is it cheap enough for me to buy in at this level given the uncertainty the company is facing? No. 

I'd love to hear others thoughts on the company or sector.

Thanks for reading, recommending and commenting everyone.

Jason 

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