New ticket pricing: SEAS experimented with new ticketing promotions this year. While the system isn'

SeaWorld ( SEAS ), a public company operating aquatic educational and entertainment theme parks, has recently found itself under attack by the media and animal rights activist groups following last summer's release of Blackfish. This film, combined with seasonally harsh weather, bad timing of holidays, and limited promotional activity, has caused the stock to reach a level we find attractive for long investors. SEAS currently trades near its all-time low, but we believe that the worst is behind it.
At $28/share, SEAS trades at a discount to peers, even as it begins to show accelerating growth off a weaker year. This is an attractive investment with potential for longer term return on invested capital in excess of 15%. This year presents several catalysts, such as growth through its largest new attraction beau rivage hotel biloxi ever, Antarctica, the upcoming 50th anniversary celebration, higher ticket prices, a captive audience, increased operating leverage, and consistent FCF generation. At these prices, we believe there is 50% upside in SEAS stock price.
Most recently, the stock has been under pressure as a result of the documentary Blackfish released last July. The film was directed by Gabriela Cowperthwaite, who previously directed City Lax: An Urban Lacrosse Story. The film attempts to portray beau rivage hotel biloxi SeaWorld as an insensitive corporation that treats large killer whales inhumanely. The director does a good job of negatively positioning SeaWorld through beau rivage hotel biloxi interviews with former SeaWorld trainers and film clips showing the whales in their limited living habitats within the parks. While we found the film to be educational, we also concluded that the director had a singular and myopic objective in directing the film and as a result, the film lacked objectivity. Our position is that there is no axe to grind against SeaWorld. The company does not take whales from the wild and does not act in a manner any differently than other amusement parks, zoos or aquariums that hold species in captivity. Furthermore, the company has become a favorite target of animal rights activists beau rivage hotel biloxi because beau rivage hotel biloxi it is now a public company. In fact, we would argue that the safety record at SeaWorld and the money spent on education and conservation beau rivage hotel biloxi at SeaWorld is far greater than 90% of the zoos, aquariums and other theme parks around the world. While we are not proponents of captivity , we recognize that there are educational benefits that come from placing humans in close contact with animals other than in their natural habitats. Below are some facts that further illustrate that the business of SeaWorld is not unique when it comes to operating activities with captive animals and aquatic life.
SEAS operates in an industry that is constantly targeted by activism and is now shouldering the brunt of the attacks as a result of the documentary. However, this activism has overhyped the decline of SEAS, and has minimal impact on the business itself, which is returning to record attendance and profitability.
SEAS was sold by Anheuser-Busch to Blackstone in 2009 as part of a cash raise to fund the AB InBev acquisition. Blackstone has exhibited the ability to successfully manage theme parks, beau rivage hotel biloxi as seen by its partial ownership in Merlin Entertainment Group (#2 theme park operator in the world) and Universal Studios (#3).
As well as five other water parks and two specialty parks. Overall, SEAS is the sixth largest theme park operator worldwide. What is unique about SEAS is although its parks compare similarly to other regional park operators such as Cedar Fair ( FUN ) and Six Flags ( SIX ), the bulk of their parks and revenue are derived beau rivage hotel biloxi from the large tourist markets of Florida beau rivage hotel biloxi and Southern California, where Disney ( DIS ) and Universal Studios (private) operate.
SEAS IPO-ed at $27/share and surged 24% in the first day. The stock hit a high of 39.65 before tumbling beau rivage hotel biloxi down the past few months to under $30. Outside of Blackfish, a couple of other reasons caused this decline:
Seasonally bad weather: SEAS generates beau rivage hotel biloxi a majority of its revenues and all of its EBITDA in the second and third quarters. It's geographically centered in Florida, beau rivage hotel biloxi with 50% of total revenues originating from the state. In 2013, rainfall increased over 100% from average during April to June in Orlando, leading to depressed attendance. SEAS parks are also more sensitive to weather beau rivage hotel biloxi compared to Disney and Universal because their parks do not include on premise hotels. Therefore, tourists are less locked-in and more likely to cancel due to weather. SEAS' regional parks, such as Busch Gardens in Tampa, are even more susceptible to these weather cancellations due to their local nature. These smaller market parks have a higher composition of seasonal beau rivage hotel biloxi pass users as opposed to one time tourists. That being said, SEAS realizes these deficiencies and has been investing in their online channel; approximately 30% of their tickets are purchased online/prepaid, which helps reduce unexpected beau rivage hotel biloxi cancellations. Overall, weather accounted for a third of the attendance decrease beau rivage hotel biloxi in 2013.
Early Easter: Easter occurred early this year and was pulled into Q1. This caused the holiday weekend to overlap with Spring Break for many families. The shift resulted in one less large weekend for SEAS and also affected the more profitable Q2 quarter. 2014 will have a normalized schedule with Easter falling into Q2 again. This accounted for a little less than a third of the attendance decline.
New ticket pricing: SEAS experimented with new ticketing promotions this year. While the system isn't completely dynamic yet (besides at Discovery Cove), the focus for management this year was to increase revenue per visitor. SEAS removed beau rivage hotel biloxi large discounts and focused on driving visitors to parks during beau rivage hotel biloxi the Monday through Friday slots. As a result, although total attendance decreased 5%, revenue per user has increased 10%. We see this as very accretive to SEAS bottom line, and expect the company to continue to maximize top and bottom line through beau rivage hotel biloxi pricing adjustments. This accounted for a little more than a third of the attendance decline.
Concerns about Blackstone selling: Blackstone has been selling stock after the lockup expired in mid-October. The market has been concerned about further selling, but we want to mention that the secondary was actually oversubscribed at $30/share.
Blackfish impact is overblown; beau rivage hotel biloxi concert cancellations will have zero impact on attendance: We have spoken to the company about potential issues with Blackfish. SEAS was very adamant and clear with us regarding attendance beau rivage hotel biloxi - there has been zero impact and there is not expected beau rivage hotel biloxi to be any future impact from the Blackfish fallout. The company mentioned that this level of activism occurs in all wildlife/animal parks, and SEAS is very familiar with dealing with these issues over the past 50 years. It isn't any more impactful or significant than before, and the only reason it seems to be a bigger deal this year is because SEAS is now a public company. In addition, beau rivage hotel biloxi SEAS believes that it will be fully able to rebook headliners for its Bands, Brew, and BBQ event at SeaWorld Orlando in Feb 2014. We want to point out that event is free (with regular park admission), so SEAS is not losing revenue on pre-sold concert beau rivage hotel biloxi tickets. Furthermore, this event occurs in the slow Q1 season and only affects a single park. It's interesting to note that Busch Gardens Tampa has the same event with performers such as The Beach Boys, Barenaked Ladies, and Goo Goo Dolls, and has not seen any cancellations nor any activism.
New attractions and 50th anniversary celebration will drive 2014 growth: SeaWorld Orlando opened Antarctica, its largest beau rivage hotel biloxi attraction ever. Initial reception has been fantastic, and due to the high turnover for first time visitors at SeaWorld Orlando, we believe that this attraction will continue to drive visitors to the park. When SEAS opened the One World One Ocean show and Turtle Reef at SeaWorld San Diego in 2011, attendance jumped 13% (3x the industry). We believe that the Antarctica attraction can easily exceed this growth. Even with weather issues, SEAS is currently experiencing record years at its parks. SEAS has also been busy at the other parks in preparation for their 50th anniversary in 2014, with new attractions at nine of their parks planned to open. This includes a new area in SeaWorld San Diego and the opening of the tallest freestanding beau rivage hotel biloxi drop tower in North America at Busch Gardens Tampa. beau rivage hotel biloxi All these attractions are expected to open after Memorial Day, and will continue to generate interest well into 2015.
As mentioned prior, weather, pricing, and the holiday schedule caused beau rivage hotel biloxi 2013 to be a weak year when solely looking at attendance. With the return of the holiday season to Q2, the strong performance of the Antarctica exhibit, and (hopefully) normal weather, we should expect SEAS to reaccelerate growth. However, the more exciting opportunity is when SEAS begins promotional pricing again. Promotional beau rivage hotel biloxi activity was minimized in 2013, and as it resumes, we believe that SEAS will be able to capture an increased audience that they did not capture this year. The industry as a whole has raised prices Y/Y, and we believe that the market can sustain higher prices with minimal impact to attendance. As management targets both attendance growth (1/3 of total growth) and revenue per visitor growth (2/3s of total growth), we believe that SEAS is in position to have a very big year.
Shift into multi-park and multiday passes and online: With the build out of the Aquatica water parks, SEAS now has a multi-park strategy around its main locations. The company should see strong cross selling as visitors are incentivized to buy higher priced passes. Expansion into the online channel (using promotional activity) should help mitigate beau rivage hotel biloxi cancellations and also drive increased operating leverage.
beau rivage hotel biloxi Inflated concerns on new Harry Potter expansion : Concerns about the opening of Harry Potter 2 at Universal Studios has also muted SEAS p