SeaWorld Entertainment, Inc.’s (NYSE: SEAS ) Intrinsic Value Could Be 34% Higher Than Its Share Price

key insights

• SeaWorld Entertainment has an estimated fair value of $77.79 based on Phase 2 equity free cash flow
• Based on the current share price of $57.97, SeaWorld Entertainment is 25% undervalued
• SEAS has an analyst price target of $75.36 3.1% below our estimate of fair value

SeaWorld Entertainment, Inc. (NYSE ticker: SEAS) from its intrinsic value? Using the latest financial data, we’ll see if the stock is reasonably priced by taking expected future cash flows and discounting them to today’s value. The discounted cash flow (DCF) model is the tool we will use to do this. Models like these may seem beyond the reach of a layman, but they are easy to understand.

We would like to remind that there are many ways to value companies, and as with DCF, each method has advantages and disadvantages in certain situations.If you want to learn more about discounted cash flows, you can find them at Simply Wall St Analysis Model.

Check out our latest analysis for SeaWorld Entertainment

Is SeaWorld Entertainment’s Valuation Fair?

We will use a two-stage DCF model, which, as the name suggests, considers two growth stages. The first phase is usually a period of higher growth, with the final value captured in the second “steady growth” period leveling off. In the first stage, we need to estimate the cash flow of the business for the next ten years. Where possible, we use analysts’ estimates, but when these are not available, we extrapolate prior free cash flow (FCF) based on the last estimate or reported value. We assume that companies with shrinking free cash flow will contract at a slower rate, while companies with growing free cash flow will experience slower growth rates over the period. We do this to reflect that growth tends to slow more in earlier years than in later years.

DCF is the idea that a dollar in the future is less valuable than a dollar today, so the sum of these future cash flows is then discounted to today’s value:

10-Year Free Cash Flow (FCF) Estimation

(“Est” = Simply Wall St estimated FCF growth rate)
10-Year Present Value of Cash Flows (PVCF) = $2.5b

We now need to calculate the terminal value, which represents all future cash flows after this decade. For a number of reasons, very conservative growth rates are used that cannot exceed a country’s GDP growth rate. In this case, we use the 5-year average of the 10-year government bond yield (2.1%) to estimate future growth. As with the 10-year “growth” period, we discount future cash flows to today’s value using a cost of equity of 10.0%.

Future Value (TV)= free cash flow₂₀₃₂ × (1 + g) ÷ (r – g) = US$484m× (1 + 2.1%) ÷ (10.0%– 2.1%) = US$6.3b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= $6.3 b÷ ( 1 + 10.0%)¹⁰= $2.4

The total value is the sum of the cash flows over the next ten years plus the discounted future value to get the total equity value, in this case $5.0b. The final step is to divide the equity value by the number of shares outstanding. Relative to the current share price of $58.0, the company appears to be 25% undervalued and 25% below the current share price. However, estimates are imprecise tools, like telescopes – shift a few degrees and end up in different galaxies. Please keep this in mind.

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We would like to point out that the most important inputs to discounting cash flows are the discount rate and of course the actual cash flows. If you disagree with these results, do your own calculations and use assumptions. The DCF also does not take into account the likely cyclicality of the industry or the future capital requirements of the company, so it does not give the full picture of the company’s potential performance. Given that we view SeaWorld Entertainment as a potential shareholder, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) accounting for debt. In this calculation, we used 10.0%, which is based on a leveraged beta of 1.327. Beta is a measure of a stock’s volatility relative to the overall market. Our beta is derived from the industry average beta of globally comparable companies, limited between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis of Sea World Entertainment

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Valuation is only one side of the coin in terms of building an investment thesis, and ideally it won’t be the only analysis you vet a company for. The DCF model is not a perfect stock valuation tool. It’s best if you apply different cases and assumptions and see how they affect the company’s valuation. If a company grew at a different rate, or if its cost of equity or risk-free rate changed drastically, the output could be very different. What is the reason why the stock price is lower than the intrinsic value? For SeaWorld Entertainment, we’ve put together three elements that you should research further:

1. risk: For example, we found 2 Warning Signs of SeaWorld Entertainment You should know this before investing here.
2. future earnings: How does SEAS’s growth rate compare to its peers and the broader market?Gain insight into analyst consensus numbers for the next few years by interacting with us Free Analyst Growth Expectations Chart.
3. Other High Quality Alternatives: Do you like a good all-rounder?explore Our Interactive List of Premium Stocks Find out what else you might be missing!

postscript. Simply Wall St updates the DCF calculation for every US stock daily, so if you want to find the intrinsic value of any other stock, just search here.

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This article by Simply Wall St is general in nature. We use only an unbiased methodology to provide reviews based on historical data and analyst forecasts, and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any of the stocks mentioned.