One company that has held up surprisingly well during the recent economic uncertainty has been the theme park operator SeaWorld Entertainment (NYSE: SEAS). This may come as a shock when you consider that one of the The first thing consumers may cut back on during tough times is expensive entertainment spending. But the company continues to defy expectations to the benefit of shareholders. Moreover, the shares have done well in the current environment and, even after the good rally, still appear to be trading at fundamentally attractive levels. Given these factors, I believe there is still upside potential for the company. And as a result, I choose to maintain a ‘buy’ rating on its stock for now.
In May of this year, I wrote an article detailing why I was bullish on SeaWorld Entertainment. In that article, I talked about how the company’s stock had been hammered in the previous months, even as the fundamental performance reported by management came in strong. I was impressed that management was buying shares and had even tried to acquire Cedar Fair (FUN) to develop further. Add in how cheap the shares were at the time, and I couldn’t help but rate the company a “buy,” reflecting my belief at the time that the stock should outperform the broader market in the foreseeable future.
So far, this call is playing very well. While the S&P 500 is down 9.2%, shares of SeaWorld Entertainment have returned 5.1% for investors. Finally, it looks like the market is starting to recognize how strong this business is. To see what I mean, just look at the data covering the second quarter of the company’s 2022 fiscal year. This is the only quarter we now have data for that we didn’t have data for the last time I wrote about it. During that period, revenue totaled $504.8 million. That represents a 14.8% increase over the $439.8 million the company generated in the same quarter a year earlier. At the end of the day, this increase in sales is due to two main factors. First and foremost, attendance at its theme parks grew nicely, up 7.8% from 5.81 million to 6.26 million. And second, the company benefited from an increase in average revenue per customer, with that metric increasing from $75.71 to $80.59. While that may not seem like a significant change, the difference applied to the company’s second-quarter participation alone was responsible for an additional $30.6 million in revenue.
Even though revenue was up quite a bit, some of the company’s bottom line showed a slight weakening. Net income in the second quarter was $116.6 million. That was actually down modestly from the $127.8 million reported in the same quarter a year earlier. This pain came from a few different factors. For example, the cost of food, merchandise and other revenue rose from 7.8% of sales in the second quarter last year to 8.2% in the same period this year. Operating expenses, excluding depreciation and amortization, rose from 35.8% of sales to 37.7%. And SG&A increased from 9.8% of sales to 11.1%. A number of factors contributed to these cost increases, including inflationary pressures, increased labor costs as the company returns to more normal operations and increased marketing efforts, costs from third-party suppliers and a legal settlement fee the company had to pay.
Although the second quarter results alone were problematic, the results for the first half of fiscal 2022 as a whole remain strong. Revenue of $775.5 million topped the $611.7 million reported a year earlier. Profits rose from $82.9 million to $107.6 million. Operating cash flow increased from $248.1 million to $299.6 million, while the adjusted amount for it increased from $171.9 million to $232.5 million. Another metric that improved year-over-year was EBITDA, which rose from $244 million in the first half of 2021 to $300.4 million in the same period this year. Using those strong earnings and cash flows, and building on the fact that the company’s stock is fundamentally cheap, management has so far repurchased $500 million worth of stock. Also, in August of this year, they launched a new $250 million share buyback program. But it is not certain how many shares have been acquired under this.
Truth be told, we don’t really know what to expect when it comes to fiscal year 2022 as a whole. But if we annualize the results we’ve experienced so far, we should expect net income of $332.9 million, adjusted operating cash flow of $680.3 million and EBITDA of $815 million. Based on these figures, the company would trade at a forward price-to-earnings multiple of 11.5. The forward price to adjusted operating cash flow multiple will be 5.6, while the forward EV to EBITDA multiple will be 7.1. Using data from fiscal year 2021, these multiples would be 14.9, 7.6 and 8.7, respectively. To put this into perspective, I also compared the company to two similar businesses. On a price-to-earnings basis, these companies ranged from a low of 13.7 to a high of 27. And in terms of the EV to EBITDA approach, the range was between 9.4 and 9.8. In both cases, SeaWorld Entertainment was the cheapest of the bunch. Meanwhile, using the price-to-operating cash flow approach, the range was between 5.6 and 6.8, with our outlook being the cheapest.
|Company||Price / Profits||Price / Operating Cash Flow||EV / EBITDA|
|Six Flags Entertainment (SIX)||13.7||6.8||9.4|
2022 is proving to be an exciting year for the investment community. For SeaWorld Entertainment in particular, the picture in recent months has been encouraging. Yes, the company is facing margin pressure. But overall, sales are growing nicely and the stock is trading at incredibly cheap levels. Management has recognized this and is using every opportunity to buy back additional shares. Add all this together and I can’t help but maintain the ‘buy’ rating I had on the stock previously.