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 14th SIX
had an intrinsic value of $58.73 and on April 4th 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 %
|
|
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.