The stock of SeaWorld Entertainment (NYSE:SEAS, 30-year Financials) gives every indication of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus’ estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $50.99 per share and the market cap of $4 billion, SeaWorld Entertainment stock gives every indication of being significantly overvalued. GF Value for SeaWorld Entertainment is shown in the chart below.
Because SeaWorld Entertainment is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company’s financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company’s financial strength. SeaWorld Entertainment has a cash-to-debt ratio of 0.19, which ranks worse than 69% of the companies in Travel & Leisure industry. Based on this, GuruFocus ranks SeaWorld Entertainment’s financial strength as 2 out of 10, suggesting poor balance sheet. This is the debt and cash of SeaWorld Entertainment over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. SeaWorld Entertainment has been profitable 7 over the past 10 years. Over the past twelve months, the company had a revenue of $431.8 million and loss of $3.99 a share. Its operating margin is -55.31%, which ranks worse than 81% of the companies in Travel & Leisure industry. Overall, the profitability of SeaWorld Entertainment is ranked 5 out of 10, which indicates fair profitability. This is the revenue and net income of SeaWorld Entertainment over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company’s stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of SeaWorld Entertainment is -27.9%, which ranks worse than 86% of the companies in Travel & Leisure industry. The 3-year average EBITDA growth rate is -29.6%, which ranks worse than 85% of the companies in Travel & Leisure industry.
One can also evaluate a company’s profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, SeaWorld Entertainment’s ROIC is -9.59 while its WACC came in at 12.60. The historical ROIC vs WACC comparison of SeaWorld Entertainment is shown below:
To conclude, the stock of SeaWorld Entertainment (NYSE:SEAS, 30-year Financials) is estimated to be significantly overvalued. The company’s financial condition is poor and its profitability is fair. Its growth ranks worse than 85% of the companies in Travel & Leisure industry. To learn more about SeaWorld Entertainment stock, you can check out its 30-year Financials here.
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