Description

THESIS SUMMARY

United Parks & Resorts (PRKS) operates domestic theme parks.  At a special meeting on March 25, shareholders will vote on a $500m share repurchase authorization that would reduce the share count by 14% and the true float by 34% at current prices.  The buyback could be completed by the end of 2024 given excess cash on the balance sheet and FCF generation in 2024.  An inflection back to revenue growth and a cost cutting plan could drive double-digit EBITDA growth in 2024, well above consensus of up 3%.  The stock could appreciate 80% to $100 based on 13x EV/EBIT (below historic 15x).  This implies 16x EPS of $6.30 that considers the repurchase and EBITDA upside, neither of which are reflected in consensus of $4.45.  The company is likely to be sold or taken private with Hill Path ownership increasing to 49%; the special meeting proxy indicates they refuse to sell into the buyback and the shareholder agreement was amended to address a take private scenario.  PRKS leverage of 2.5x EBITDA is materially below public peers at 4x and typical buyouts are even higher; leveraging the balance sheet could generate enough capital to buyout the non-Hill Path holders at a significant premium.

DESCRIPTION

PRKS operates theme parks and water parks under the SeaWorld, Busch Gardens, Sesame Place, Aquatica, Water Country, Adventure Island and Discovery Cove brands.  Revenue by geography is estimated at: Orlando FL 39%, Tampa Bay FL 20%, San Diego CA 16%, Williamsburg VA 13%, San Antonio TX 10%, Langhorne PA 2%.  Estimated attendance mix: local domestic 55%, out-of-state domestic 35%, international 10%.  The company is in the initial stages of adding international parks in a capital efficient way via royalties and incentive fees.  PRKS is considering adding hotels on 400 acres of developable land adjacent to their parks, also likely in a capital-lite way.  Theme parks have solid barriers to entry driven by the need for vast amounts of land near major metropolitan areas, difficult permitting, high 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.

TRENDS VS. PRE-COVID

EBITDA increased from $457m in 2019 to $713m in 2023 as revenue has grown at a 5% CAGR while costs grew at 1% per year.  Attendance was 21.7m in 2023, slightly below the ~22.5m in the pre-COVID years of 2014-19.  Admissions revenue per capita was $44 in 2023 and has grown at a 5.5% CAGR since 2019, roughly in line with inflation.  In-park spending on food and merchandise was $36 per capita in 2023 and grew at a 7.8% CAGR since 2019 due to pricing for inflation plus executing to grow volume by adding venues and staff to improve throughput, enabling purchasing through the mobile app, and improved merchandising.  Operating and SG&A expenses grew well below revenue as COVID shutdowns forced a zero-based budgeting exercise that resulted in numerous efficiencies. 

INVESTMENT THESIS

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.  2023 was likely reflective of normalized conditions as domestic revenge travel ended (see domestic airline results) and consumers reigned in indiscriminate spending as budgets were pressured by inflation and dwindling savings.  Indeed, 2023 EBITDA of $713m came up short of what were once expectations of $800m.  PRKS pricing was below inflation and attendance declined y/y in 1Q23-3Q23.  However, there are indicators the business is reaching solid footing.  4Q23 attendance and revenue were stable y/y and EBITDA was only down 2%.  The season pass base as of February 2024 is only slightly off record levels with pricing up high-single digits y/y.  San Diego park lease payment (available via open records requests and correlate directly to revenue) in January 2024 was +10%, the first growth since June 2023 and was highest January since I began tracking in 2013.  The $85m cost savings plan, of which $50m is expected to be realized in 2024, is a nice hedge if I’m wrong on the revenue line.

2) I expect 12% (+$85m) EBITDA growth in 2024 to $800m, well above consensus at +3% (+$20m) to $733m.  Normal 4% revenue growth at 80% incremental margin = +$55M.  Cost savings plan = +$50m.  20% return on ROI-based capex = +$10m.  4% SG&A and opex inflation = -$35m.  Consensus is assuming 3% growth in revenue, cost and EBITDA for 2024, which doesn’t account for the cost savings plan and/or under-estimates the high incremental margins on revenue growth.  The cost savings plan centers around reducing third party spend by insourcing and rebidding contracts as well as leveraging tech investments made to optimize labor scheduling, marketing and reduce manual processes.  There is evidence cost savings are about to accelerate again now that the company is optimizing again - the EBITDA calculation specific to creditors includes an addback for future cost savings related to actions already taken that surged to an all-time high $23m in 4Q23, and they spent a record $34m on “business optimization, development and strategic initiative costs” in 2023.

3) Transitioning from building cash during 2023 to massive repurchase.  After repurchasing nearly $700m in 2022, the company only repurchased $18m in 2023 – a disappointment to investors.  With Hill Path’s ownership at 42%, the board refused to authorize further repurchases until they reached a new shareholder agreement, followed by a vote of the remaining shareholders.  At a special meeting on March 25, shareholders will vote on the new shareholder agreement and a $500m repurchase authorization.  The company has $200m of excess cash on the balance sheet and will likely generate $300-400m of FCF in 2024, thus they should be able to execute the entire program by year end.  If approved and executed at the current market price, this will result in 9m shares repurchased and a 14% decline in total shares.  While the total shares outstanding are 65m, the true float is only 26m when backing out non-sellers: Hill Path (27m), Hill Path’s swap with Nomura (5m), and indexes (7m).  Thus, if the stock doesn’t rise, PRKS will reduce the true float from 26m shares to 17m shares, a very significant 34% decline.   

4) PRKS is trading at just 10x consensus 2024 EBIT and 9x my estimate.  Historically theme parks have traded at 15x LTM EBIT.  PRKS traded at a high valuation from IPO in 2013 to 2018 due to a perception it was under-earning.  Then new management increased EBITDA over 50% from 2017 to 2019, where it ended at 15x EBIT.  Six Flags traded very high historically due to solid EBITDA growth, but also was underinvesting and paying no cash taxes; the stock deflated to 14x EBIT when these issues corrected in 2019.  Historically Cedar Fair has traded at about 15x EBIT over the last two decades, which is where it was in 2019; at the GFC low it got down to 10x and has traded into the high-teens when people are optimistic.

5) 80% upside in the stock based on 13x EV/EBIT, below historic theme park multiple of 15x, and giving effect to the upcoming repurchase.  Assuming they hit my $800m EBITDA estimate for 2024, EBIT will be $600m.  EV would be $7.8b at 13x EBIT.  Less debt of $2.1b equals $5.7b market cap.  Assuming they execute the repurchase and buy 9m shares, there would be 56m shares left.  $5.7b market cap divided by 56m shares = $100 stock, 80% upside from here.  Note I leave out $247m of cash as I assume that goes toward the repurchase.  $600m of EBIT and 55m proforma share count would equate to EPS of about $6.30, implying a P/E of 16x at $100 target price.

6) Solid downside protection.  $5.4b current EV isn’t much higher than $4.6b in 2019 despite EBITDA +55%.  PRKS valuation multiples are at an all-time low, implying expectations that EBITDA will decline, despite the signs of stabilization/growth.  The onus is on the bears from here to prove EBITDA is about to fall apart.  Even if EBITDA declines 15% (theme parks EBITDA has historically declined 10-15% in recessions), at current $55 stock price EV/EBIT would be 13x, still below normal 15x.  PRKS owns approximately 2,000 acres of land, providing another layer of downside protection. 

7) PRKS is likely to get sold or taken private.  Hill Path is highly aligned with shareholders given their 40%+ ownership that is heading higher.  In the special meeting proxy, Hill Path made it clear they would not sell into the buyback despite being asked to do so by the company.  They will own 49% of the economics upon completion of the buyback (their vote is still capped at 24.9%).  The next major move is likely a sale or take private.  The Hill Path principals come from private equity and have significant theme park expertise.  Interestingly, Hill Path and the company recently agreed to add a take private amendment to the shareholder agreement, which establishes that a majority of non-Hill Path shareholders must approve any take private of PRKS by Hill Path.  PRKS is levered 2.6x EBITDA vs. peers at 4.0x; levering up 5x would facilitate a take private by Hill Path with no additional equity capital.  Private equity has a long history in the theme park industry (e.g. Blackstone/SeaWorld, Blackstone/Merlin, Apollo/Cedar Fair, EQT/Parques Reunidos, Premier Parks/Dan Snyder/Six Flags), generally buying in the range of 10-12x EBITDA. 

RISKS

1) Recession / over-earning.  Historically recessions have resulted in a 10-15% hit to EBITDA.  PRKS’ current valuation more than reflects this.  Assuming the stock should be valued at the historic 15x EV/EBIT ascribed to numerous theme park companies, the current enterprise value is already implying EBITDA will decline 21% PERMANENTLY.  This is despite the previously mentioned evidence that EBITDA is likely to grow from here.  The $85m cost savings plan is a big hedge to being wrong about the consumer / over-earning.

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.  The decision to end breeding of whales likely reduces this risk to no more than a zoo’s, which the vast majority of Americans are fine with.  The company changed their shows to be educational in nature rather than a circus exhibition.  They have also more actively promoted their status as by far the largest marine animal rescue organization in the United States, and forged partnerships with the Humane Society, noted conservationists, and researchers.

3) Hill Path = following the repurchase, Hill Path will own 49% of the shares outstanding, or 57% including their swap position held by Nomura.  I am comfortable with their increasing ownership position due to their vote being capped at 24.9% and any take private by Hill Path requiring a majority of non-Hill Path shareholders approving such a transaction.  I believe Hill Path’s presence is a major positive for shareholders.  They have extensive theme park expertise; their presence on the board has coincided with EBITDA increasing 2.5x and PRKS margins have gone from the lowest to the highest in the theme park industry.  Their interests are highly aligned with other shareholders.

Catalyst

Repurchase authorization gaining shareholder approval.  Reduces share count by 14% and the true float by 34%.

EBITDA surprises to the upside in 2024.  A resumption of EBITDA growth should lead to a much higher multiple as fears of declines recede.

Sale or take private of the company.