SeaWorld Entertainment may soon run short on oxygen
SeaWorld Entertainment's public image has already come under attack due to alleged mistreatment of killer whales. Now, the company's stock is also being put through the wringer. Should investors hang on for the ride or get out?
SeaWorld shares plunged 35 percent in late trading Wednesday after the company missed second-quarter earnings estimates and projected a decline in revenue for the full year. The company pointed to a number of issues, including new openings at competing parks and a delay in the debut of one of its own attractions.
More worrying is that SeaWorld has a structural problem: Long-term damage to its brand related to the alleged mistreatment of whales and other animals. The company said attendance was hurt by "demand pressures related to recent media attention" from legislative proposals in California, where some lawmakers have raised questions about potential harm to animals at SeaWorld parks.
If animal rights issues are a serious part of the sales slump, SeaWorld could be in deep water. Attention around the treatment of animals began to swirl after last year's release of "Blackfish," a documentary focused on alleged mistreatment of killer whales at SeaWorld parks. More recently, Southwest Airlines decided to remove SeaWorld animal images from a few of its planes. Animal rights groups have a tenacious following and they will likely continue to host protests that attract media attention.
That could put more pressure on SeaWorld to cut ticket prices to draw an audience. The company said admission prices rose 9 percent in 2013, which generated a hefty boost to revenue. But in the second quarter, the company said it had to be "more aggressive than we expected" with promotions. Even with those deals, attendance rose a meager 0.3 percent during the quarter.
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Some rivals, meanwhile, have continued to draw healthy crowds. Walt Disney reported an 8 percent increase in revenue from its parks and resorts division in the June quarter, thanks to higher spending and attendance.
What's more, the company has financial leverage that leaves less room for error. SeaWorld has net debt of about $1.5 billion, but a market capitalization of just $1.6 billion as of late trade Wednesday. That leverage means any decline in the enterprise value of the entire company tends to have a relatively large impact on the value of the company's stock.
Some of that leverage stems from SeaWorld's history as a private company under a Blackstone Group fund, which bought the business in 2009. Blackstone has sold down most of its stake since the company's 2013 IPO, but it still owns about 14 percent of SeaWorld's shares.
Debt could cause other problems for SeaWorld. Under an agreement disclosed in May 2013, the company is required to maintain net debt that is no more than 3.5 times adjusted earnings before interest, taxes, depreciation and amortization. If it goes above that level, the company may face restrictions on dividend payments or stock buybacks. Company spokesman Fred Jacobs declined to comment.
That's potentially problematic for SeaWorld, which offers a healthy 4 percent dividend yield and also announced plans Wednesday to launch a $250 million buyback program at the beginning of 2015.
The good news: SeaWorld also said Wednesday that it plans to restructure its debt and gain more flexibility to take actions such as share buybacks. But those financing deals haven't been locked down and it's unclear how receptive banks will be if the company's operating performance continues to deteriorate.
With negative publicity likely an overhang on SeaWorld for some time, investors may want to resist the temptation to go fishing for a bargain.
—By CNBC's John Jannarone