Key Insights

• SeaWorld Entertainment’s estimated truthful worth is US$77.79 primarily based on 2 Stage Free Cash Flow to Equity
• SeaWorld Entertainment is estimated to be 25% undervalued primarily based on present share worth of US$57.97
• The US$75.36 analyst price target for SEAS is 3.1% lower than our estimate of truthful worth

How far off is SeaWorld Entertainment, Inc. (NYSE:SEAS) from its intrinsic worth? Using the latest monetary knowledge, we’ll check out whether or not the inventory is pretty priced by taking the anticipated future money flows and discounting them to right now’s worth. The Discounted Cash Flow (DCF) mannequin is the device we are going to apply to do that. Models like these could seem past the comprehension of a lay individual, however they’re pretty simple to observe.

We would warning that there are lots of methods of valuing an organization and, just like the DCF, every method has benefits and drawbacks in sure situations. If you need to be taught extra about discounted money movement, the rationale behind this calculation may be learn intimately within the Simply Wall St analysis model.

View our latest analysis for SeaWorld Entertainment

Is SeaWorld Entertainment Fairly Valued?

We are going to make use of a two-stage DCF mannequin, which, because the title states, takes under consideration two phases of development. The first stage is mostly the next development interval which ranges off heading in the direction of the terminal worth, captured within the second ‘regular development’ interval. In the primary stage we have to estimate the money flows to the enterprise over the subsequent ten years. Where potential we use analyst estimates, however when these aren’t accessible we extrapolate the earlier free money movement (FCF) from the final estimate or reported worth. We assume firms with shrinking free money movement will gradual their price of shrinkage, and that firms with rising free money movement will see their development price gradual, over this era. We do that to replicate that development tends to gradual extra within the early years than it does in later years.

A DCF is all about the concept a greenback sooner or later is much less precious than a greenback right now, and so the sum of those future money flows is then discounted to right now’s worth:

10-year free money movement (FCF) estimate

(“Est” = FCF development price estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$2.5b

We now have to calculate the Terminal Value, which accounts for all the longer term money flows after this ten 12 months interval. For a variety of causes a really conservative development price is used that can’t exceed that of a rustic’s GDP development. In this case we’ve got used the 5-year common of the 10-year authorities bond yield (2.1%) to estimate future development. In the identical approach as with the 10-year ‘development’ interval, we low cost future money flows to right now’s worth, utilizing a value of fairness of 10.0%.

Terminal Value (TV)= FCF₂₀₃₂ × (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= US$6.3b÷ ( 1 + 10.0%)¹⁰= US$2.4b

The complete worth is the sum of money flows for the subsequent ten years plus the discounted terminal worth, which leads to the Total Equity Value, which on this case is US$5.0b. The final step is to then divide the fairness worth by the variety of shares excellent. Relative to the present share worth of US$58.0, the corporate seems a contact undervalued at a 25% low cost to the place the inventory worth trades at the moment. Valuations are imprecise devices although, quite like a telescope – transfer a couple of levels and find yourself in a unique galaxy. Do preserve this in thoughts.

The Assumptions

We would level out that a very powerful inputs to a reduced money movement are the low cost price and naturally the precise money flows. If you do not agree with these end result, have a go on the calculation your self and play with the assumptions. The DCF additionally doesn’t take into account the potential cyclicality of an business, or an organization’s future capital necessities, so it doesn’t give a full image of an organization’s potential efficiency. Given that we’re taking a look at SeaWorld Entertainment as potential shareholders, the price of fairness is used because the low cost price, quite than the price of capital (or weighted common price of capital, WACC) which accounts for debt. In this calculation we have used 10.0%, which relies on a levered beta of 1.327. Beta is a measure of a inventory’s volatility, in comparison with the market as an entire. We get our beta from the business common beta of worldwide comparable firms, with an imposed restrict between 0.8 and a pair of.0, which is an affordable vary for a secure enterprise.

SWOT Analysis for SeaWorld Entertainment

Moving On:

Valuation is just one aspect of the coin when it comes to constructing your funding thesis, and it ideally will not be the only real piece of study you scrutinize for an organization. The DCF mannequin just isn’t an ideal inventory valuation device. Preferably you’d apply completely different instances and assumptions and see how they might impression the corporate’s valuation. If an organization grows at a unique price, or if its price of fairness or danger free price modifications sharply, the output can look very completely different. What is the rationale for the share worth sitting under the intrinsic worth? For SeaWorld Entertainment, we have compiled three additional components it is best to additional analysis:

1. Risks: For instance, we have found 2 warning signs for SeaWorld Entertainment that you need to be conscious of earlier than investing right here.
2. Future Earnings: How does SEAS’s development price evaluate to its friends and the broader market? Dig deeper into the analyst consensus quantity for the upcoming years by interacting with our free analyst growth expectation chart.
3. Other High Quality Alternatives: Do you want a superb all-rounder? Explore our interactive list of high quality stocks to get an thought of what else is on the market chances are you’ll be lacking!

PS. Simply Wall St updates its DCF calculation for each American inventory every single day, so if you wish to discover the intrinsic worth of some other inventory simply search here.

Have suggestions on this text? Concerned in regards to the content material? Get in touch with us immediately. Alternatively, e mail editorial-team (at) simplywallst.com.

This article by Simply Wall St is common in nature. We present commentary primarily based on historic knowledge and analyst forecasts solely utilizing an unbiased methodology and our articles aren’t supposed to be monetary recommendation. It doesn’t represent a suggestion to purchase or promote any inventory, and doesn’t take account of your aims, or your monetary scenario. We intention to deliver you long-term targeted evaluation pushed by elementary knowledge. Note that our evaluation could not issue within the newest price-sensitive firm bulletins or qualitative materials. Simply Wall St has no place in any shares talked about.