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SeaWorld Entertainment (NASDAQ: SEAS) has a lot going on right now.
First, the theme park operator announced it will stop breeding killer whales and phase out shows that involve them.
The market rejoiced. Shares are up 15% in just the last 30 days.
However, there has been an overhang at SeaWorld since the 2013 documentary “Blackfish,” which took the killer whale company to task over keeping orcas captive. Attendance has been on the decline the last couple years and its stock has fallen 30% over the last two years. It’s now down close to 40% from its 2013 initial public offering.
Socially Responsible Benefits
The big catalyst for SeaWorld is that there could be an immediate boost in traffic thanks to the socially responsible angle. But there’s also a marketing angle. SeaWorld is positioning the announcement as the last generation of orcas in captivity, so this will be the last chance to see these animals up close and personal.
But more recently, SeaWorld is facing pressure from another type of activist – an activist investor. Spotlight Capital wants a board overhaul at SeaWorld. The fund owns 4% of SeaWorld and has said that it approves of the recent changes, but believes the board needs some “fresh blood.” Part of the issue is that none of the current board members have any theme park experience
Long-Term Benefits
For better or worse, all this means a relatively big overhaul of SeaWorld’s business model. On the positive side, investors will get a 4% dividend while they wait for the full transition of the business.
But at the same time, SeaWorld is already paying out 90% of its earnings via dividends. And at 18 times forward earnings, it’s not cheap enough for a company that’s in the midst of a huge business model shift, as it remains to be seen how SeaWorld makes up for lost revenues. It has said it will keep other animal shows, such as dolphins, but notes that could change based on customer preferences.
While SeaWorld’s move is a positive in terms of social responsibility, the fallout for its business, and ultimately cash flows, remains to be seen.
Nonetheless, the theme park angle is interesting right now – especially as employment remains high, gas prices remain low and consumer spending starts to pick up. Consumer spending and gross domestic product for the fourth quarter were recently revised upward.
Better Theme Park Plays
There could be better plays in the theme park market besides SeaWorld. First, there’s Six Flags Entertainment (NYSE: SIX), which offers a 4.2% dividend yield. Six Flags is the world’s largest theme park operator, but it’s also priced as such. Its stock trades at close to 30 times next year’s earnings estimates. Meanwhile, it’s paying out over 100% of its earnings via dividends.
What looks to be the best way to play the theme park market is Cedar Fair (NYSE: FUN), which trades at just 16 times forward earnings – and more importantly, offers the best dividend in the theme park space at 5.6%. As a master limited partnership, it’s required to pay out more than 90% of its income via dividends.
Reasons to love Cedar Fair go beyond its robust dividend and solid valuation. It has a double-digit return on invested capital and profit margins that dwarf SeaWorld.
In the end, SeaWorld spent a lot of money trying to repair its reputation, only to give in to animal activists with its transition to natural encounter exhibits. It’s also not clear what will be the key attraction once orcas are phased out altogether. Meanwhile, Cedar Fair has a solid base of theme parks that should do well as gas prices remain low and consumer spending rises.
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