SeaWorld Entertainment Will Continue To Remain 40% Below Pre-Covid Levels

After a formidable rise of almost 200% since its March lows of this year, at the current price of $22 per share, SeaWorld Entertainment stock (NYSE: SEAS) seems to have reached its near-term potential. SEAS stock has trebled from over $7 to $22 off the recent bottom compared to S&P 500 which has increased more than 50% from its recent lows. The stock was able to beat the market as the lifting of lockdowns and opening up of the economy is leading to expectations of a gradual restarting of theme parks which have been shut since March due to the pandemic. Also, with the US government announcing a string of measures to keep businesses afloat, investor sentiment improved over recent months.

Despite the stock still being 40% below its pre-Covid peak of $37 in February, it is unlikely to recover to that level anytime soon. The stock is expected to hover around the current level of $22 until all the facilities are opened up and the footfalls go back to the pre-crisis level. Our dashboard What Factors Drove -1.1% Change In SeaWorld Entertainment Stock Between 2018 And Now? provides the key numbers behind our thinking.

The rise in stock price between 2018 and 2019 was primarily driven by 2% growth in revenue, which was further amplified by 96% rise in profitability. The net income margin increased from 3.3% in 2018 to 6.4% in 2019. The sharp rise in profits in 2019 was due to a reduction in operating expenses, especially labor costs, primarily from a focus on cost efficiencies and the impact of cost savings initiatives, which has driven the stock price higher in 2019. On a per share basis, earnings increased from $0.52 in 2018 to $1.11 in 2019.

The P/E multiple went down from over 40x in 2018 to below 30x in 2019 due to EPS rising faster than the stock price. However, the P/E ratio plunged in 2020 and currently stands at 20x. This drop in 2020 was due to the impact of coronavirus which led to the shutting down of the company’s theme parks.

Where Is The Price Headed?

The ongoing lock down of major cities and economic slowdown following the outbreak of coronavirus has adversely affected the company’s theme and amusement parks business which has virtually seen idle rides and empty properties due to a complete shutdown. Theme parks and merchandise & food (which depends on footfalls at theme parks) comprises 100% of the company’s revenues. The gravity of the impact of the pandemic on the company’s business was reflected in the recently released Q2 2020 results, where total revenues dropped by a whopping 96% y-o-y. That is virtually a complete wipe out of the top line. Thus, the lockdown is having an adverse impact on the entire business of SeaWorld Entertainment. This compares unfavorably with rival Disney, as less than 40% of Disney’s revenues are contributed by parks and resorts. You can also see how SeaWorld Entertainment and Six Flags Entertainment compare with each other.

However, there are signs of lifting of the lockdowns over recent weeks. With the gradual lifting of lockdowns, and as the economy opens up, the company is gradually re-opening a few of its facilities. The phased reopening of its parks began in June and continued till August for some of its facilities. This led to some rise in the stock over the last few months. But the recent surge in Covid positive cases in the US is proving to be a concern for the company. SEAS management has said that it does not plan to open some of its facilities (which have not opened yet) for the remainder of 2020 operating season. The risk that the company faces is a sharp rise in positive cases and re-imposition of the lockdown. Though another complete lockdown looks unlikely as of now, any further rise in the stock would likely be only after all its facilities open up and the footfalls go back to pre-Covid levels. In the near-term SEAS stock could hover around $22.

For further insight into the theme parks segment, see how Cedar Fair compares with close rival SeaWorld Entertainment.

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