Invest in Sea World Entertainment (SEAS -0.88%) These days it was like sitting in the swimming area at one of the marine life park’s water shows. You’ll be close to the action in front of the glass, but you’ll probably be completely wet by the end of the performance.
SeaWorld Entertainment reported disappointing financial results Wednesday morning. Sales fell 3% in the seasonally strong third quarter, marking the worst sales since 2020 with pandemic-related closures. The stock itself will trade lower in 2023.
Against a backdrop of sloppy financials after consecutive quarters of declining sales, something interesting happened last week. Six Flags (SIX 0.64%) confirmed reports that it would take over the regional amusement park operator Cedar Fair (FUN 0.85%) in a union of equals. The merger is expected to close in the first half of next year, in time for the busy summer travel season. It may not seem immediately obvious, but this is a good thing for SeaWorld Entertainment. Let’s take a closer look at what the deal could do to improve SeaWorld’s rudderless ways.
Release the octopus
The combination of Six Flags and Cedar Fair doesn’t appear to have much of an impact on SeaWorld Entertainment’s business. Many of the latter’s busiest parks are in Central Florida, more than a six-hour drive from the nearest closed attraction, Six Flags or Cedar Fair. Elsewhere, there are Six Flags or Cedar Fair turnstiles closer to the SeaWorld parks, but probably not enough to have a direct impact on foot traffic and guest spending.
However, the merger of two leading regional players should benefit SeaWorld in several ways. First of all, this means that Cedar Fair is off the table as a possible SeaWorld buyout. The market wasn’t impressed when SeaWorld made an unsolicited $3.4 billion takeover offer early last year that was ultimately rejected. With Cedar Fair and Six Flags no longer potential partners, SeaWorld must focus on organic growth. It might also be time to snap up much smaller players at a steep discount. When Cedar Fair finally makes itself available after the demise of SeaWorld in 2022 and Six Flags in 2019, there could be desperation among others in this highly fragmented industry.
The merger should also help SeaWorld, as a combination of Six Flags and Cedar Fair will likely firm prices for the industry. The combined players could realize cost-saving synergies that they can pass on to consumers through cheaper prices, but who are we kidding? With a larger property portfolio, the 2024 version of Six Flags should be able to justify higher prices for the more expensive season passes, which include access to all thrill-seekers’ paradises.
Finally, SeaWorld may benefit from increased and potentially positive analyst attention. Matthew Boss at JP Morgan accepted coverage of SeaWorld last week with an uninspiring neutral rating. However, in the note, he pointed out that Six Flags trades at a valuation premium to SeaWorld. With less to follow as a publicly traded attraction operator, opportunistic investors could turn to SeaWorld as a pure play company in the theme park industry.
Things aren’t going well for SeaWorld right now, and that was easy to see when the company went to some pretty extreme lengths to encourage guest visits. Encouraging annual passholders to visit multiple times within a short period of time to lock in prizes or revising its inclement weather policy to give guests a rain check on hot days highlighted the difficult quarter it delivered this week.
Attendance of 7.1 million guests in the third quarter reflected a 3% decline in revenue. Net profit fell 8%. Analysts expected more at both ends of the income statement. Per capita revenue fell because an increase in park spending per guest was not enough to offset the decline in admissions.
SeaWorld isn’t backing down from the challenge. It continues to invest in new rides and attractions, which is crucial in its namesake parks as they try to distance themselves from the controversial marine life shows they used to host.
With the country’s top two theme park operators recently raising their prices, this should be a golden opportunity for SeaWorld to either raise its own prices or stand its ground and gobble up market share. Investors have steered clear of travel and tourism stocks that initially weathered the pandemic well, but that doesn’t mean SeaWorld Entertainment will be left out in the cold for much longer. Six Flags’ merger with Cedar Fair should help.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Rick Munarriz holds positions at SeaWorld Entertainment. The Motley Fool holds positions in and recommends JPMorgan Chase and Six Flags Entertainment. The Motley Fool recommends Cedar Fair and SeaWorld Entertainment. The Motley Fool has a disclosure policy.