Digging deeper into United Parks & Resorts

Today, I'm continuing my discussion on United Parks & Resorts (PRKS)...

The company operates theme parks and water parks under the SeaWorld, Busch Gardens, Sesame Place, Aquatica, Water Country USA, Adventure Island, and Discovery Cove brands. And in Friday's e-mail, I analyzed the financials – writing that "the business has had its ups and downs over the past 15 years."

As I concluded:

United Parks' historical financial results show a mixed picture...

As the pandemic ended and people made up for lost time by ramping up travel – going to movies and amusement parks, etc. – United Parks' profits and [free cash flow] sharply improved... but haven't grown at all in the past few years.

When I continue my analysis of United Parks on Monday, I'm going to need to see a very cheap stock or a very compelling growth story to convince me that it would be a stock to buy...

So what's the bull case for this stock?

To answer this question, I turned to two sources: a write-up on my favorite stock idea website, Value Investors Club... and an interview I did with an industry expert who asked to remain anonymous.

On Value Investors Club, someone posting under the handle "durableadvantage" ("DA") pitched the stock on March 21 (since it was posted more than 45 days ago, anyone can read it now).

DA argues that United Parks is a very good company in a decent industry:

Theme parks have solid barriers to entry driven by the need for vast amounts of land near major metropolitan areas, difficult permitting, high [capital expenditure ("capex")] requirements, and need for intellectual property related to theming.

PRKS has a highly differentiated experience with many of their parks offering a combination of immersive animal experiences and variety of roller coasters that is unmatched. This is reflected in strong pricing power, a 25% return on invested capital, and the highest margins in the theme park industry.

DA's investment thesis rests on seven pillars, which I summarize here:

1. The market has dumped travel stocks due to over-earning fears, but that has played out, the business is stabilizing and expectations have been recalibrated.
2. I expect 12% (+$85m) [earnings before interest, taxes, depreciation, and amortization ("EBITDA")] growth in 2024 to $800m, well above consensus at +3% (+$20m) to $733m.
3. Transitioning from building cash during 2023 to massive [share] repurchase.
4. PRKS is trading at just 10x consensus 2024 [earnings before interest and taxes ("EBIT")] and 9x my estimate. Historically theme parks have traded at 15x [last 12 months] EBIT.
5. 80% upside in the stock based on 13x [enterprise value ("EV")]/EBIT, below historic theme park multiple of 15x, and giving effect to the upcoming repurchase.
6. Solid downside protection. $5.4b current EV isn't much higher than $4.6b in 2019 despite EBITDA +55%.
7. PRKS is likely to get sold or taken private.

Lastly, DA highlights three risks:

1. Recession/over-earning. Historically recessions have resulted in a 10-15% hit to EBITDA.
2. Animal rights = In 2013, documentary film Blackfish created a wave of anti-SeaWorld sentiment, which the company largely ignored under old management. PRKS is now proactively managing this and hasn't had any major issues since.
3. [Private-equity firm] Hill Path = following the repurchase, Hill Path will own 49% of the shares outstanding, or 57% including their swap position held by Nomura. 

I'll note that the day of DA's Value Investors Club post back in March, PRKS shares closed at $54.72. On Friday, they closed at $48.45.

To better understand PRKS and the industry, over the weekend I had a long conversation with a longtime industry veteran who asked to remain anonymous.

He agrees that theme parks are very good businesses for a variety of reasons:

They are a highly differentiated experience. People, especially young people, want out-of-home experiences.

Any business in leisure and entertainment competes with every other, so we compete with concerts, sporting events, movies, going skiing or to the beach, etc. This has been true for a century and will continue to be true.

If you compare the cost per hour of entertainment, a regional theme park offers the best value by far.

As he continued, that value gives the industry some "latent pricing power" – and is one of the reasons why theme parks are more resilient during recessions than you might expect:

During the global financial crisis, EBITDA was only down about 10%. And only 18 months after the pandemic lows, EBITDA for the industry hit record highs.

The industry structure is also favorable, so competition tends to be rational. Most amusement parks are monopolies or duopolies, with a few oligopolies like in Orlando.

Technological advances are a tailwind – for example, they allow the industry to manage labor better and develop apps to improve customers' experiences.

But that naturally led me to ask about capital intensity – and if the theme-park companies could grow. As he replied:

Yes, they are capital intensive, but there are massive barriers to entry, so they have close to 40% EBITDA margins and generate a lot of cash. Plus they tend to own all of their real estate.

And they do grow. If you assume population growth of 1% annually and add a bit of inflation and pricing power, you get to 4% revenue growth, roughly double 2% growth in costs. That translates into 5-8% growth in EBITDA. After capex and favorable tax attributes, free cash flow grows steadily at a minimum 7%, maybe even up to 10% annually.

So if they're such great businesses, I then asked why their stocks trade at such low multiples. Here's what he told me:

The industry has a lot of bad management teams – both in terms of operating the businesses and communicating with investors. If we were better at the latter, our stocks would trade at high-teens multiples. Right now, they're so low that they're in silly territory.

Finally, I asked for his observations about United Parks. As he said:

A lot of people think that the controlling shareholders, Hill Path, have squeezed everything they can to improve the business and margins. I disagree.

For example, when Anheuser Busch owned Busch Gardens, they treated it as a toy and didn't care about profitability.

I think they're only in the second or third inning of improving operations, so they're under-earning.

And the stock is only trading at 7 times EV/EBITDA.

Hill Path obviously thinks it's cheap, as they got shareholders to approve a $500 million share repurchase authorization in March and bought back $213 million in the second quarter. The company only has a $2.8 billion market cap, so that's huge.

After taking a look at United Parks' financials and getting this additional perspective, I'm intrigued enough to investigate this further by visiting some of United Parks' properties and perhaps get a chance to talk to someone in management.

I actually hope to see mediocre operations – that it's hard to buy a ticket, the food is terrible, etc. – because that's the key to this investment: that there's plenty of low-hanging fruit for management to pick to improve operations, margins, and cash flows.

If so, then this stock, fueled by huge share buybacks, looks like it could easily double.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.