Should You Join in the SeaWorld Entertainment Inc (SEAS) IPO Bandwagon?

However, heavy debts aren’t Seaworld’s biggest threat as the maturity date on most of those obligations is more than five years away. The real trouble is that about 55% of Seaworld’s total revenue come from Florida, so it is highly vulnerable to hurricanes.

Additionally, entertainment and theme parks don’t do well during rough economic conditions, as consumers start cutting their discretionary expenses. Seaworld witnessed this in 2009 when the number of visitors and spending rates both declined heavily. Worse, Seaworld’s competitor, Six Flags Entertainment Corp (NYSE:SIX), was forced to file for bankruptcy in 2009.

Even after emerging from the bankruptcy, Six Flags Entertainment Corp (NYSE:SIX) suffered losses in 2011. It still has a very high debt-to-equity ratio of 3.3, which further increases the risk. Though Six Flags recorded a net profit of $354 million last year, actual profits were only $109 million if you exclude one-time gains.

It operates mostly in North America where market has almost stagnated. And that’s clearly reflected in Six Flags Entertainment Corp (NYSE:SIX)’ sales growth, which has been a meager 2% a year since 2007. To keep investors interested, Sea Flags distributes $180 million in annual dividends ($3.60 a share), much more than its annual profit of $109 million.

Blackstone’s position

Blackstone will retain its 73% stake in Seaworld. The private-equity firm itself is in a strong financial position. Its total assets under management soared 26% to a record $210 billion in FY 2012. More than 70% of its total AUM are under long-term contracts that have no redemption risk.

In a recent period, Blackstone’s net income jumped 30% to about $2 billion, and adjusted EBITDA was up 49% to $1.3 billion. The private-equity firm has A+ rating from Fitch and A-rating from Standard & Poor’s. Blackstone gives shareholders an annualized dividend yield of 5.9%.

Conclusion

Despite the successful IPO, I don’t find Seaworld valuable. It’s saddled with debts, has very low variable costs and high fixed costs, and most of its business is concentrated in Florida. Furthermore, Seaworld is not so resilient during unfavorable economic conditions. In 2009, the company’s earnings dropped and it suffered losses in 2010 as customers cut back on discretionary spending. That, coupled with high debts, is a big threat.

The article Should You Join in the SeaWorld IPO Bandwagon? originally appeared on Fool.com is written by Roberto Bañaga.

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