Credit Suisse Upgrades SeaWorld from Underperform, Lowers Target To $12

Credit Suisse’s Benjamin Chaiken believes that with concerns regarding the guidance and consensus expectations being lowered for SeaWorld Entertainment Inc SEAS now in the rear-view mirror, the risk-reward on the stock has changed.

Chaiken upgraded the rating on the company from Underperform to Neutral, while lowering the price target from $15 to $12.

Valuation More Appropriate

With the stock having declined 35 percent since May, management having recently lowered the guidance range and the 2Q16 earnings missing the expectations, the concerns surrounding SeaWorld seem to now be priced into the stock.

“While we do not believe SEAS is in a better position structurally, we think mgmt. guidance, street expectations and valuation are now more appropriate, and mgmt. has alluded to the fact that capital allocation may be shifting towards more thrill based experiences,” Chaiken mentioned.

The analyst believes the company should cut its dividend and reinvest the funds in the business.

Capital Allocation

According to the Credit Suisse report, “SEAS is not generating significant value for its 7 percent yield and would need to borrow this year simply to afford the dividend payment.”

Chaiken believes SeaWorld could fund about 2-3 roller coasters each year from the dividend proceeds alone.

The analyst also expressed bullish sentiment on the regional theme park business, given its high margin, differentiated content and low maintenance capex, although Chaiken stated that the company’s current efforts in this business have not been strong enough.

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