SeaWorld (NYSE:SEAS) reported second quarter earnings August 13 after the markets closed. The theme park operator missed badly in its first quarter as a public company. Those who bought shares of its IPO at $27 are probably wondering if they should sell and take profits while they still can.
 
I believe investors should sell as soon as they possibly can--this IPO was doomed from the start. 
 
IPO Background
Blackstone Group (NYSE:BX) took SeaWorld public on April 18 at the high end of its intended range. The company itself sold 10 million shares with Blackstone selling 16 million with an over-allotment option for another 3.9 million shares, which the underwriters exercised. SeaWorld's net proceeds of $245.4 million were used for several items including the repayment of $180.8 million in long-term debt and an increase in its cash position. 
 
Blackstone Payday
The private equity firm invested $975 million of its own capital to acquire SeaWorld in December 2009 from Anheuser-Busch InBev (NYSE:BUD) for $2.5 billion. The difference was paid for with new debt issued by SeaWorld. Blackstone received dividends totaling $615 million in 2011 and 2012 as well as $47 million in the IPO for a 2009 advisory agreement that was terminated by SeaWorld. All told, Blackstone used just $318 million of its own money. 
 
The net proceeds from the 19.9 million shares sold in the IPO came to $505 million with 58.75 million shares to sell as early as October 16. Regardless of what happens between now and the fall, Blackstone has already recouped its initial investment of $975 billion as well as generating a realized profit of $187 million for its investors with another $1.84 billion in unrealized profits based on a $31.40 share price. That's an annualized return on its investment of 72.6%. Shamu's been good to Blackstone. 

SEE: The Smart Money Loves These 10 Stocks
 
Missing So Soon
It's never a good thing when a company delivers a negative surprise in its first quarterly earnings report. It's even worse when it's a 24% miss as is the case with SeaWorld. In addition to the earnings miss, it projects that 2013 revenue will be between $1.45 billion and $1.48 billion, slightly less than the $1.5 billion estimate set by eight analysts. 
 
Not one…or two…but eight! How does a company that only went public at the end of April miss by the end of June? If you bought shares in the IPO and are still holding you have to sell because if it delivers another miss in Q3 it's all over but the crying. Its share price will be sub-$20 before you know it. 
 
In my original article about SeaWorld's IPO my math was a little off. Actually—a lot off. I estimated that it would have 124.7 million shares outstanding after the IPO when it fact that came in at 92.74 million. I came to that outrageously high number because I valued the entire SeaWorld business at eight times EBITDA or $3.35 billion. Working backwards I figured it would price between $12 and $14 per share meaning it would need to sell more shares. However, underwriters valued its business at 10.5 times EBITDA, which meant an IPO market cap of $2.5 billion, not $1.5 billion as in my estimate. 
 
Bottom Line
In my April article I noted that both Cedar Fair (NYSE:FUN) and Six Flags (NYSE:SIX) had significantly larger real estate holdings than SeaWorld. In my opinion this was reason enough to balk at a valuation more than eight times EBITDA. Cedar Fair just delivered record second quarter earnings August 8. It has an enterprise-value-to-EBITDA ratio of almost half Shamu's. To own SeaWorld when you can get a much better deal elsewhere makes no sense at all. 
 
Personally, I'd have a hard time considering SeaWorld's stock until it's trading below $20. In my opinion it's definitely time to get out of the pool. 
 
Disclosure: At the time of writing, the author did not own shares of any company mentioned in this article.

Related Articles
  1. Investing News

    Super Savings for Your Super Bowl Party? Bet on It

    Prices for wings, avocados and TVs are all coming down, which will make your Super Bowl 50 festivities less costly.
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  4. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  5. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  6. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  7. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  8. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  9. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  10. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center