Why investors should stay away from SeaWorld, Six Flags, and Cedar Fair?

Why investors should stay away from SeaWorld, Six Flags, and Cedar Fair?

It is reported that SeaWorld plans to sell 20 million shares between $24 and $27 a piece. At the midpoint of $25.50 per share, shares would trade at 27 times trailing earnings. Competitors Six Flags (SIX - 12.1 times), Cedar Fair (FUN - 22.6 times), Carnival Corp. (CCL - 17.9 times), Walt Disney (DIS - 19 times) trade at lower multiples. (By Abram Brown @forbes.com.)

By multiples of free cash flow (FCF), a more popular measurement, the multiples are SIX (14.9 X), FUN (12.1 X), Carnival Corp. (39.8 X), and Walt Disney (29.8 X). Taking MorningStar evaluation as a starting point, the so called intrinsic value per share are: SIX ($ 66.37 at 5.5~5.6% 3-yr growth rate), FUN ($ 34.94 at 3.9~5.3% 3-yr growth rate), CCL ($ 41.00 at -2.6~4.6% 3-yr growth rate) and DIS ($ 60.00 at 3.4~5.4% 3-yr growth rate). Meanwhile, on March 14^th SIX had an intrinsic value of $58.73 and on April 4^th this value increased to $66.37. Stock valuation creates miracle.

Such a set of growth rate is much more than optimistic considering the current economy, unemployment, market and competition, especially for FUN and SIX. I do not see the reasons that SIX should grow faster than FUN, CCL, DIS. If other conditions do not change while SIX and FUN are comparable, assume FUN’s intrinsic value at 34.94 is reasonable, SIX’s intrinsic value should be no more than $55 per share.

Multiples	TTM Earning	Free Cash Flow	Market Price per share	Intrinsic Value per share	Growth Rate (3-Yr revenue)
SeaWorld ($$$)	24~27 X		$	$	%
Six Flags (SIX)	12.1 X	14.9 X	$ 73.20	$ 66.37	5.5~5.6 %
Cedar Fair (FUN)	22.6 X	12.1 X	$ 40.30	$ 34.94	3.9~5.3 %
Carnival (CCL)	17.9 X	39.8 X	$ 34.95	$ 41.00	(2.6)~4.6 %
DisneyWorld (DIS)	19.0 X	29.8 X	$ 60.55	$ 60.00	3.4~5.4 %

The multiples of SeaWorld is apparently too high and overvalued. But from my point of view, the whole industry is overvalued as well. Why SeaWorld IPO now? The top 2 reason should be seasonality and overvalued stocks of theme park industry. Memorial Day weekend (the final weekend of May) marks the traditional kickoff of summer theme park season, and virtually investors intend to bull such stocks before the “sell in May”. That is why SeaWorld is releasing price range at this moment to test water. All theme park stocks are overvalued at this moment and investors should expect a major correction in months. Reasons are coming up in the next paragraphs.

(1)    Market and competition

Where are the competitors? I put the locations of FUN, SIX, SeaWorld and DIS in one map so that readers can easily figure out what we are talking about. SeaWorld has 3 locations (as we can see from its website), and it compete with DIS in Orlando, with SIX in San Antonio, and with FUN in San Diego. Actually, they compete with each other at also everywhere in United States, especially for FUN and SIX, and it is difficult to build regional monopoly. Although SIX 10-K reports said that the parks “strategically” located in US, we hardly can see any clear strategy by location other than geographic demography. The promotion strategies are common for all the parks, such as seasonal pass, all-your-can-eat, etc. Keep this in mind, the customer groups for the theme parks should be relatively stable even these companies may prefer slightly different promotion and programs. As a common sense, if there is a park 15-mile away from your home people rarely travel 100 miles to another one just because that park has a roller coaster 10-feet higher than that of the park closer.

(2)    Cyclical industry? How comes the 5%+ growth rate?

Then, with the relatively stable customer group, how can theme parks get more money from their pockets? Is the disposable income increasing? Are they willing to spend more under such a slow economy? Where does the money come from to support the growth rate of 5%?

The following map will tell you why a growth rate of 5% sounds like a mission impossible. The increasing food stamp population will tell the truth – individual budget for entertainment is tighter than ever before. Investors would better forget the "conviction-buy" SIX of $83.50 per share by Goldman Sachs if they still remember Goldman Sachs’s famous forecast in mid-2008 that oil price would surge to $200 a barrel. By the way, I agree that Goldman Sachs has more power in manipulating stock price than anyone else.

The only reason that keeps the share price high is the involvement of institutes, funds and dominant insiders. How can small investors mitigate the risk? Stay away from SeaWorld, FUN and SIX stocks.

 

Conclusion:

SeaWorld IPO would be good for current stake holders to cash in, but bad for others to invest. You may say that this industry can create strong cash flow, but if the cash flow is really strong enough why IPO? We know the equity market is already red hot and index is at all-time high this week. We also know that the industry competition is fierce and hardly to say which one has clear advantage over others. Therefore, it does not matter how well Blackstone can market this event, the fundamental purpose is to pocket cash through IPO.

Why SIX FLAGS is not a reliable long-term investment?

Interestingly, Goldman Sachs started covering SIX FLAGS with a target price at $83.5. Each and every time comments from Goldman will remind me its famous estimation of oik price in early 2008. As nobody, I have no way to learn whether deals made under the table already before these estimation and forecast being released, but investors should at least keep in mind that Goldman Sachs involved in SIX FLAGS bankruptcy re-organization 3 years ago.

Why SIX FLAGS is not a reliable long-term investment?

(1)   the repurchase volume: (based on Yahoo Finance and latest 10K report)

From Jan 1 to Feb 19, in 33 trading days totally 15,755,800 shares traded. During the same period, SIX FLAGS repurchased 3,200,000 shares, or 20.31% of the trading volume. How this repurchase can impact the share price?

From March 1 to April 5, in 25 trading days the trading volume is merely 1.2% of floating and 0.75% of total outstanding shares (Yahoo Finance). How many of these shares were to be cancelled or just switched hand between institutes? We will see this soon once institutes report to SEC.

(2)   Misleading target price or intrinsic value? Top institutions pocket cash now.

The calculation of many target prices looks more like a number game rather than science. For example, some calculations start with current share price, and assume current price is reasonable. So, you may understand why SIX FLAGS target share price can reach $81, while the intrinsic value evaluated by MorningStar is hanging around $60. (But increased to $67 just yesterday, my analysis will be available shortly to tell why the estimated revenue growth rate is too high in this report). Before making decisions based on those free target price numbers, investors should do necessary homework and clearly understand the logic behind them, as well as the pros and cons of such logics.

Recent SEC reports show that some large institutes are selling SIX FLAGS and pocket cash. Always keep an eye on this because small investors are disadvantaged in term of information.

(3)   Growing company? Growth rate? (search for the definition of growing company and typical gimmick of decorating…)

Many companies want to label themselves as growing company, such as SIX FLAGS. Then, those professional will feel free to manipulate the growth rate. As regional theme parks have very focused customer groups (people rarely drive more than 80 miles to a theme park just because that park has a roaster that is 10 ft higher than another park at the door), even selling seasonal pass could not guarantee more visits. Keep in mind that in-park consumption has much higher cogs than that of admission. The local market should be largely fixed, needless to say the higher tax rate starting in 2013. Local community will have more disposable cash for entertainment in 2013? You should think it over carefully. The high growth rate? You’d better forget it. Please take a look at the profitability of Disney because everyone knows Disney is the market leader in this industry. I must admit that seasonal pass gives the management team more flexibility to manipulate quarterly revenue.

Common sense: If home is close to park, pass visitors do not need waste too much money in the park. If far from home,  # of visits for each pass-holder would be low.

What else should investors know?

(4)   insider trading volume

The insider trading is very active in Q4 of 2012 due to the coming change of capital gain tax. In 2013Q1, such trading volume is minimal.

(5)   track record

History repeats itself, but wise investors would not repeat mistakes. Buckle up if you do want to join the game, and cross your fingers.