BofA Cuts SeaWorld To Underperform

• SeaWorld Entertainment Inc SEAS shares are up 1 percent year-to-date, despite a 15 percent decline in May 12.
• BofA Merrill Lynch’s Bryan Goldberg downgraded the rating on the company from Neutral to Underperform, while reducing the price target from $22 to $19.
• SeaWorld Entertainment’s turnaround seems to be “more evolutionary than revolutionary,” Goldberg stated.

At its Investor Day, SeaWorld Entertainment provided a glimpse of how it intends to stabilize and grow the business. Analyst Bryan Goldberg mentioned that management prioritized the following:

1. Delivering more conservation focused experiences
2. Offering more distinct attractions and events
3. Driving organic and strategic revenue growth
4. Pursuing reputation improvement
5. Executing financial discipline

Management indicated that it could take six to nine months for stabilization, and that EBITDA margins could return to around 30 percent in 3 years, with an additional 200-250 bps possible with cost cuts in the next 2-3 yrs. “Yet specifics were somewhat light, leaving the co. very much in the “first inning” of a ‘show me’ story,” Goldberg wrote.

SeaWorld Entertainment’s turnaround seems to rely heavily on further repairing its reputation, a realignment of its zoological offerings with what consumer interests are today and more effective capital investments.

In the report BofA Merrill Lynch noted, “For now, mgmt. does not plan to alter orca shows at SeaWorld FL/TX and we expect a lengthy challenge to the Coastal Commission’s proposed ban on orca breeding at SeaWorld CA as a condition for Blue World approval.”

The company’s turnaround is still in the initiate stages, and significant execution is needed against a challenging operating environment, Goldberg said, while adding that clear signs of stabilization are unlikely until 2Q16.