Down Nearly 50%, SeaWorld Entertainment Could Still Make Money

Theme park and entertainment company SeaWorld Entertainment (NYSE:SEAS) is a relatively small player among giants such as Disney (NYSE:DIS) and Comcast (NASDAQ:CMCSA) owned Universal. But it is just as badly hit due to the travel halt, restrictions on consumer movement, and the fear that the pandemic has infused. The stock is down more than 48% this year (as of July 15, 2020), revenue in Q1 2020 was down 30% resulting in a $58 million operating loss, and the worst is yet to come as the demand slump is likely to be the highest in the second quarter. SeaWorld saw nearly $90 million in cash outflow from operations and capital expenditures in Q1 2020. How bad could the entire year be? Is the balance sheet strong enough to survive? We assess the Impact Of The Covid-19 Recession On SeaWorld Entertainment in an interactive dashboard with a focus on SeaWorld’s liquidity reserves and cost structure. We find that if annual revenue fall 30%, SeaWorld can still generate around $350 million of free cash flow from operations. However, it had a small operational runway if demand dropped to zero based on its beginning year cash pile. This required it to manage its liquidity reserves carefully. To do this, SeaWorld extended its line of credit by taking total debt to $1.78 billion. 

The first two quarters are likely to account for the bulk of the sales decline. For the full year, there is a good chance that SeaWorld’s revenue could drop to less than $1 billion vs $1.4 billion in 2019. This would imply net income declining from $89 million to net loss of $-29 million, resulting in nearly a 35% fall in free cash flow from operations. The good news is that this cash flow will still be healthy at around $230 million. This is sufficient to cover SeaWorld’s capital expenditures, which we believe are likely to be curtailed this year. 

Another way to look at SeaWorld’s financial resilience is understanding its cost structure and break even point. We estimate that variable operating expenses were $830 Mil in 2019, representing 70% of total operating expenses. Based on this we calculate that variable operating expenses represent 59% of revenues, and determine that break-even operating income can be supported by a change in annual revenue of -37% vs 2019. Thus, we consider SeaWorld in a relatively safe zone. To sum things up, SeaWorld Entertainment is facing a sharp demand slump, but is in a good position from a cash flow perspective if it can limit the full year revenue decline to 30%. It still has a reasonable cushion to absorb additional decline over what we expect. 

While we talk about companies at significant risk from a Covid-19 induced demand slump, don’t forget to check out our low risk high fliers portfolio. These 5 S&P 500 stocks that could turn out to be outperformers.   

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