Shamu Makes a Splash on Wall Street: The New SeaWorld IPO

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SeaWorld Entertainment, whose theme parks are the home of killer whales and roller coasters, has just filed for a $100 million Initial Public Offering (IPO) with the U.S. Securities and Exchange Commission.  The home of Shamu, sea otters, and approximately 67,000 sea life creatures has not revealed much about its intentions.  Although SeaWorld has revealed that they plan to trade under the ticker “SEAS,” the company has not revealed how many shares of stock will be offered, what stock exchange will host their stock, how the shares will be priced, or when those shares will be offered to the public.  The company is going to be assisted through the process by JPMorgan and Goldman Sachs.  But, the announcement that SeaWorld is going public raises an important question:  Is SeaWorld a good investment to plunge into?  I believe that the answer is yes in the short term and no in the long term.  SeaWorld and other similar amusement park companies have been doing fairly well as 2012 draws to a close, but SeaWorld needs to resolve its debt issues and find more stable sources of revenue than what it currently relies on.

Consideration #1:  SeaWorld is in seemingly good hands

Ever since the private equity firm Blackstone (NYSE: BX) acquired SeaWorld parks in 2009 from Anheuser-Busch (NYSE: BUD), SeaWorld has been faring quite well.  According to statistics from Bloomberg News, Anheuser-Busch did not do that good of a job in managing SeaWorld, while Blackstone has taken SeaWorld to better days.  At the time of the acquisition, these amusement parks weren’t profitable—they lost $58 million in December 2009 alone—but they’ve been able to generate revenue since:  In 2011 net income was $19 million, and in the first nine months of 2012, SeaWorld bested 2011’s total by chalking up $86 million in net income.

Also, the SeaWorld IPO process is going to be guided by two Wall Street powerhouses – JPMorgan Chase and Goldman Sachs.  SeaWorld, therefore, has experienced bankers and financiers at their beck and call to help out with the IPO process.

What does this mean for enterprising, prospective SeaWorld investors?  It means that SeaWorld appears to be in good hands under the leadership of Blackstone and with the guidance of JPMorgan Chase and Goldman Sachs.  So, one fundamental of business appears to be good – SeaWorld is generating revenues and becoming more profitable.  But…

Consideration #2:  SeaWorld largely relies on unstable sources of revenue

As SeaWorld noted in its official filings, 70% of its revenues are derived from admissions fees, while another sizable amount is drawn in from sales of food and various amenities inside the parks themselves.  One of the primary attracting factors for SeaWorld attendees are the sea critters and their performances.

This creates a considerable amount of risk, and SeaWorld’s delicate balance of profits can easily be wiped out by poor attendance or budget-conscious consumers.  With general economic uncertainty, food prices and the cost of living might skyrocket, thus further decreasing incentives for people to go to an amusement park.  Also, the sea animals themselves present a fiscal risk.  In 2006, an orca trainer was pulled underneath the water by an orca in a near-fatal accident which broke the trainer’s foot and attracted national attention.  And, in 2010, another trainer was killed by an orca at SeaWorld Orlando.  If the primary “product” that SeaWorld sells, the animals, don’t behave or cooperate, then SeaWorld will have less people come in its doors and therefore less revenue.   The animals are subject to infectious diseases, and dangers lurk in their interactions with humans, too.  Therefore, Shamu and friends are potential assets as well as potential liabilities.

However, it is important to note that even with economic uncertainty…

Consideration #3:  Similar entertainment stocks did great in 2012

Overall, many amusement park stocks made for great short-term investments in 2012.  Six Flags (NYSE: SIX) has gone up 45% in 2012, while Cedar Fair (NYSE: FUN) has climbed 49%.  And, as previously noted, Blackstone’s profit plans for SeaWorld seem to be working.  Blackstone stock itself is up “only” 9% this year.

However, SeaWorld does share another similarity with Six Flags and Cedar Fair, which isn’t good for long-term growth if it doesn’t go away…

Consideration #4:  SeaWorld is loaded…with debt

Six Flags has bounced back in dramatic fashion from Chapter 11 bankruptcy to an incredible success story.  It has significantly reduced its burgeoning debt load, a one key factor to the company’s success.  Still, as of March 2012, Six Flags had over $900 million in debt.  Cedar Fair, for comparison, has $1.16 billion of variable-rate term debt (before giving consideration to fixed-rate interest rate swaps), $400.4 million of fixed-rate debt, $155.0 million borrowed under its revolving credit facilities and $7.3 million in cash on hand.

SeaWorld also has quite a bit of debt to deal with.  The company is hoping that the IPO will help to pay off its $1.8 billion debt load.  So, while SeaWorld has had a couple of good years, it is still in an ocean of debt and needs to swim its way out.  That decreases profitability and overall year-over-year returns.  The final point to explore is…

Consideration #5:  The financial “nitty-gritty” that has yet to be revealed

As previously noted, although SeaWorld has revealed that they plan to trade under the ticker “SEAS,” the company has not revealed how many shares of stock will be offered, what stock exchange will host their stock, how the shares will be priced, or when those shares will be offered to the public.  Therefore, the average investor really doesn’t have much of an idea as to if the stock and the company as a whole will be overvalued or undervalued until the release date of the IPO draws nearer and SeaWorld unveils more details.

The “nitty-gritty” is an important aspect of determining whether or not one should invest in a stock – and until we get that information from SeaWorld, I wouldn’t dive headlong into buying up SeaWorld shares.

The Bottom Line

Although SeaWorld is heading in the right direction, the overall state of the amusement park industry is a very risky business to get involved in.  After considering all of the factors involved, I personally would not invest in SeaWorld either at its IPO or for a long-term stock pick.  If, however, you are in for a high stakes, short term gamble, then you can snap up SeaWorld shares in April 2013 before the summer craze and sell off your positions in mid-to late September after SeaWorld has loaded up the summer loot and school is back in session.  But, I would ardently advise that at this point, SeaWorld should not be a potential long-term investment.

SeaWorld’s transition from Anheuser-Busch to Blackstone has resulted in a new era of growth and prosperity at the abode of enormous orcas and barking sea lions.  But, when one investigates the numbers and the risks, SeaWorld is, at the most, a very short-term investment.

EvanBuck has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Goldman Sachs Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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