SeaWorld Entertainment Inc (NYSE:SEAS)’s issues could be structural rather than fleeting, according to analysts at Goldman Sachs. As a result, they cut their price target for the company’s stock from $34 to $20 per share, although they maintained their Neutral rating.
Downside risk to SeaWorld
In a report date dated Aug. 14, 2014, analysts Afua Ahwoi, Steven Kent and Lara Fourman said even though SeaWorld’s share price dropped significantly this week after the company’s disappointing second quarter result, they see downside risk to SeaWorld. The analysts said a decline in the multiple could pull shares lower and that management’s turnaround strategy is currently less than obvious.
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They also said that SeaWorld Entertainment currently seems to be dealing with issues that are company-specific and may be more about structure rather than being just temporary issues. They say the company faces pressure from competition in its core markets. The Goldman Sachs team conducted research in June and found that SeaWorld has been consistently losing market share in Orlando since the opening of Universal’s Harry Potter about four years ago.
They also believe SeaWorld’s business model looks more challenged because the company is raising its capital expenditures budget. In addition, they note that the company has continued to receive bad publicity because of how it treats and uses sea animals in its shows.
The Goldman Sachs analysts added that they’re unsure exactly what SeaWorld Entertainment’s management has planned to turn around the company. Management projects a 6% to 7% decline in revenues this year and has not been clear about how they will get to revenue growth next year. The analysts note that SeaWorld has begun a new program to cut costs but say that management think it’s too early to offer much detail to investors.
They also believe the company’s free cash flow is “less compelling.” Because of lower earnings and higher capital expenditures, they say their 2015 and 2016 estimated free cash flow drops by about 40%. The analysts cut SeaWorld’s multiple from 9.1 times to 8.5 times because of concerns about the company’s continuing problems.