Over the past six months, United Parks & Resorts has been a great trade, beating the S&P 500 by 5.4%. Its stock price has climbed to $36.18, representing a healthy 16.9% increase. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in United Parks & Resorts, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think United Parks & Resorts Will Underperform?
We’re happy investors have made money, but we're swiping left on United Parks & Resorts for now. Here are three reasons we avoid PRKS and a stock we'd rather own.
1. Decline in Visitors Points to Weak Demand
Revenue growth can be broken down into changes in price and volume (for companies like United Parks & Resorts, our preferred volume metric is visitors). While both are important, the latter is the most critical to analyze because prices have a ceiling.
United Parks & Resorts’s visitors came in at 3.22 million in the latest quarter, and over the last two years, averaged 2.7% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests United Parks & Resorts might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
United Parks & Resorts has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 12.1%, below what we’d expect for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, United Parks & Resorts’s ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of United Parks & Resorts, we’ll be cheering from the sidelines. With its shares beating the market recently, the stock trades at 7.8× forward P/E (or $36.18 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d suggest looking at one of our top software and edge computing picks.
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