3 Reasons Why Citi Projects 28% Downside In SeaWorld Shares

Despite SeaWorld Entertainment Inc (NYSE: SEAS) beating expectations in certain financial metrics in its May first-quarter earnings report, investors may be overlooking three notable risks, according to Citi. 

The Analyst

Citi's Jason Bazinet downgraded SeaWorld Entertainment from Neutral to Sell with a $15 price target.

The Thesis

SeaWorld reported flat year-over-year EBITDA in May, which came in better than the $23-million decline the Street was looking for, Bazinet said in the downgrade note.

The better-than-expected metric also resulted in a short squeeze, which helped boost the stock to its highest two-year forward multiple since its 2013 initial public offering at around 9.7x 2019E EV/EBITDA.

Yet the high stock multiple is unwarranted, as the Street is overlooking key risks, the analyst said:

• Expectations that a stronger U.S. dollar will pressure international attendance.
• Expectations for higher LIBOR interest rates that would increase the company's interest costs for its $550 million 2020 term loans and $1 billion in 2024 term loans.
• New competition from "Star Wars" attractions in SeaWorld's key markets of Florida and California.

Citi's $15 price target implies downside of 28 percent from Monday's levels and is based on: 

• A 7.0x fiscal 2019 EBITDA ($12 per share).
• A $3 premium for the potential sale of Busch Gardens. 

Price Action

Shares of SeaWorld Entertainment were trading lower 6.71 percent premarket Tuesday at $19.60, which is below the stock's 52-week low of $20.73.

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