SeaWorld Entertainment (SEAS) stock lost a third of its value yesterday after it posted an ugly quarter and cut its full-year guidance because bad publicity over the treatment and behavior of killer whales hurt attendance.
SEAS stock was already off about 22% for the year-to-date, hurt by a documentary titled Blackfish, which depicts the mistreatment of SeaWorld’s orca whales and the company’s attempts to whitewash incidents in which the animals killed their trainers.
Hey, they’re called killer whales for a reason, but the movie sure ruins the image of SeaWorld as a happy place to take the whole family. The whales are cute … but they’re also miserable and occasionally kill their captors.
The film and ensuing actions by animal rights activists helped attendance fall more than 4% through the first half of 2014. SeaWorld expects continued weak attendance to cause revenue to decline 6% to 7% this year. Before the guidance cut, SeaWorld expected revenue to increase by at least 2%.
And although SEAS stock swung to profitability in the second quarter vs. a year-ago loss, earnings per share missed Wall Street estimates by 16 cents.
Add it all up, and SeaWorld lost about $800 million worth of market value during Wednesday’s session.
SeaWorld the Bargain Stock
As Financial Times points out, the action in SEAS stock was a nice respite from the almost total lack of volatility in markets this year. Nothing is really moving, and investors are complacent — and although that’s good for everyone’s blood pressure, it makes it hard for traders to generate winning bets.
Seen that way, the sinking of SEAS stock serves as an example of be careful what you wish for, but it also affords a buying opportunity. These types of knee-jerk trading reactions are almost always — always — overdone, whether it’s to the upside or down.
Based on that alone, there’s a good chance SeaWorld stock will post gains this morning. Obviously, that’s not certain, but it’s probably a better-than-even money bet.
It’s also the case that SeaWorld isn’t stupid. To soften the blow of the lousy earnings and forecast, SEAS launched a cost-cutting program — something the Street always likes — and a $250 million share repurchase program — something the Street always loves.
Meanwhile, cash is king, and SEAS is swimming in it. Cash flow grew to $121 million from $74 million a year ago. That’s ample liquidity to invest in the business or give more cash back to shareholders.
Lastly, Wednesday’s selloff means SeaWorld stock now goes for 11 times forward earnings, or 26% cheaper than the broader market. That makes it look like a bargain. It looks even more so that way when you consider that SeaWorld has a long-term growth forecast of more than 20%. Once the bad publicity subsides, there’s ample reason to expect SeaWorld stock to come back on multiple expansion alone.
As cruel as SeaWorld is to killer whales — and it is unconscionable to keep wild animals in captivity — SEAS stock looks like a buy.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.