United Parks & Resorts Inc

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

A theme park and entertainment company providing experiences that connect people and animals, while facing challenges in attendance and regulatory scrutiny.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

United Parks & Resorts (PRKS), formerly SeaWorld Entertainment, is an entertainment and theme park company with a portfolio of renowned parks across the United States. They primarily operate theme parks, including marine life parks, zoological parks, and water parks. The company also generates revenue from food and beverage services, merchandise sales, and other ancillary services. PRKS’s parks aim to provide engaging experiences while promoting animal conservation and education.

The company’s brand portfolio includes:

  • SeaWorld: Focused on marine life with orca and dolphin shows and other exhibits
  • Busch Gardens: Theme parks offering animal interactions alongside thrill rides
  • Discovery Cove: An all-inclusive resort, mainly located in Orlando
  • Aquatica: Water parks with both slides and animal exhibits
  • Sesame Place: Theme parks based on the characters from Sesame Street

In 2023, the company generated 74% of its revenues from theme park admissions, and the remaining 26% from food, merchandise, and other services.

Competitive Landscape

The theme park industry is highly competitive, with major players including The Walt Disney Company, Universal Studios, and regional competitors.

While their strategy of combining animal encounters and amusement rides is unique in the market, they also face competition from other entertainment venues such as movie theaters, sporting events, and outdoor recreation, which all vie for consumers’ leisure time and dollars.

Several competitive advantages and disadvantages of PRKS are as follows:

  • Strengths: A strong brand identity and a portfolio of well-known brands. Extensive knowledge and expertise in animal care and marine conservation. A diversified portfolio of theme parks, located across major markets.
  • Weaknesses: Highly dependent on park attendance, which can be affected by weather, economic downturns, and adverse events. Increased scrutiny and negative public opinion about the welfare of animals in captivity. Subject to regulatory scrutiny by various government agencies.

Financial Analysis

  • Revenue Distribution: The company generates revenue primarily through admissions, merchandise, food and beverage, and other revenue streams. There are some regional differences in its performance; the Florida park locations have strong seasonal demand from tourists, and that has had a substantial positive impact on overall financials.
  • Margins: Operating margins tend to be variable due to factors such as attendance levels, labor costs, and marketing expenses. During peak seasons like summer and holidays when the theme parks are more crowded, margins are typically higher. On the cost side, expenses are driven by labor, animal care, and marketing.
  • Financial Health: PRKS operates with a fair degree of leverage, but does not have debt that may be considered high for the industry. A large portion of the debt comes in the form of long term loans with set interest rates. Their cash reserves are fairly low, however, that can be explained by the high capital expenditure as the company constantly upgrades and renovates the theme parks.
  • Profitability: As noted earlier, profitability varies greatly throughout the year, depending on the season. Their income statements show high profits during peak season and usually break even or a loss during the rest of the year.

Recent Performance and Concerns

  • Performance Highlights: The company reported an increase in net revenues and improved attendance across its parks, as the theme parks were reopened after the COVID-19 pandemic slowdown. While the company’s earnings are improving, the revenue growth needs to be more sustainable.
  • Cost Inflation: Cost inflation is affecting the company more and more, especially in the area of wages and food prices, and will cause margins to suffer significantly if management does not find a way to mitigate this effect.
  • Reinvestment and New Parks: The company is trying to balance expenses with reinvestment in capital assets. While it is good to keep the parks updated and in good shape, the pace and the spending involved must be reasonable to guarantee long term returns. Furthermore, the return on new investment must be higher than the weighted average cost of capital to drive future growth. This has to be taken into account when making all these crucial decisions about capital allocation.
  • Share Repurchase Program: The company has a share repurchase program in place which will benefit long term share value, but this can cause additional leverage if the company is not performing well.
  • Capital Structure and Debt: The company has considerable debt and has to carefully manage its repayment schedule with revenues.
  • Employee relations: The management in their earnings calls has talked about their efforts to improve employee relations through increased compensation and other benefits.

Moat Analysis

The company possesses a narrow moat as it enjoys limited competitive advantages:

  • Brand Recognition: PRKS’s portfolio includes well-known brands, such as SeaWorld and Busch Gardens. However, brand power is not always the most reliable source of a competitive advantage, as it doesn’t guarantee customer loyalty or repeat purchase behavior. As noted earlier, customers may decide to invest their time and money into other entertainment alternatives.
  • Intangible Assets: Some of the company’s assets are intangible, such as the animals and exhibits in their parks, but the unique experience is easily replicated by competitors. New theme parks will typically feature their own animals or similar concepts.
  • Switching costs: Switching costs for customers are very low. Patrons can go to any other amusement park and receive a similar level of entertainment without any additional hassle, thus, PRKS does not have significant customer loyalty.
  • Cost advantages: While PRKS may be able to achieve economies of scale in some areas such as shared service centers and marketing, other costs like capital expenses and animal care limit their ability to significantly reduce operational expenses, especially as they add more experiences to their theme parks.
  • Network Effect: The company doesn’t benefit from a network effect advantage. Network effect refers to a moat that arises from how valuable a product or service becomes as more people use it. With PRKS, one person going to the theme park or aquarium does not make the experience better or more attractive for other visitors.

Moat Rating: 2/5 The company’s moat is narrow as their brand does not equate to significant pricing power or customer loyalty. The company does have a slight advantage on the operational side, stemming from economies of scale.

Risks to the Moat and Business Resilience

  • Reputational Risk: Any negative publicity about the treatment or well-being of their animals, or any accidents in the park, can lead to a significant decline in public trust and hence attendance. Furthermore, lawsuits or controversies have a severe impact on stock valuations of entertainment based companies.
  • Competition: The intensely competitive nature of the theme park industry can undermine PRKS’s advantage by enticing customers to competitor offerings. This limits the power of pricing and the potential for growth.
  • Economic Downturns: Economic slowdowns can reduce demand for leisure activities, impacting park attendance and discretionary income of individuals, therefore hitting the company’s bottom line.
  • Regulatory Changes: Increased regulatory scrutiny over animal welfare can lead to higher operating costs and may impact business models. Further governmental regulations might restrict operations or expansion of theme parks.
  • Climate Change: Climate change also presents long-term risks, like extreme weather events and rising sea levels, which can negatively impact operations, insurance, and assets. Also, the company has had to close its parks because of hurricanes and other extreme weather events, indicating that climate change events have a direct impact on the company’s financial performance.
  • Black Swan Events: Pandemics and disease outbreaks can decimate attendance at their locations. Given the limited geographical locations of their parks, it creates a non-diversifiable risk.

Business Resilience: Despite some of the risks above, the company has shown it can overcome adverse conditions, through a combination of cost cutting and operational efficiencies. In order to improve further resilience, the company needs to focus on increasing its brand name, by creating more loyal customers, and reducing reliance on admissions by having other avenues of revenue generation.

Understandability

While the business model, as a theme park operator, is easy to understand, the financial analysis and performance metrics are quite complex. Furthermore, evaluating the factors that influence sustainable value creation, such as brand strength and management quality is not straightforward. Additionally, the impacts of local macroeconomic conditions, such as inflation and currency volatility, can further complicate the situation. Understandability: 2/5 The business model itself is straightforward, but the financials are complex and depend on a variety of intertwined factors.

Balance Sheet Health

While the company has had a substantial amount of debt, it’s not unmanageable with debt-to-equity in the range of 30-45 percent and debt is largely composed of long term loans which are at a fixed rate. Cash reserves are slightly low but as mentioned before, can be attributed to capital expenditure and reinvestment. Furthermore, the company has consistently generated revenue for a long period of time and is quite stable, that allows it to service and pay its debt obligations, but there may be issues if the company faces severe adverse shocks. Balance Sheet Health: 3/5 The company has a moderate amount of debt and a stable revenue stream which makes the balance sheet relatively healthy.