A postmortem on $PRKA - why I sold my shares at a loss
My first public write up went wrong, find out why
In sport, they say, you learn the most from games you loose. In sales, the calls you don’t close, teach you the most. So instead of publishing another new idea, I wanted to reflect on a public investment thesis that went wrong. My first public write up, that I published and that got me into MicroCapClub.
You find my original thesis here:
One and a half years later, I’ve sold all my shares at a loss of 33%. Since I have a regular income that is still quite high in comparison to my portfolio, it is quite rare for me to sell a stock. Let’s dig into my old thesis and compare it with reality.
#1 Error: I overestimated the business quality
In my Substack, I wrote:
“I believe the business model is attractive for several reasons, (…)
Natural Moat through location. Even though they compete against other forms of entertainment, no one will place a similar park next to them. Hence, the business should be protected from competition”
Even though, I believe that the business is at least of decent quality, the barriers to entry in this industry are lower, than in other amusement parks. Resulting in the fact, that, indeed, somebody could place a park close to it. In fact, the Texas park is close to another park, which could be the reason it is underperforming (more on that later).
”They have pricing power. In the entertainment sector, a company sells an adventure. No family wouldn‘t buy the ticket, if it would be 2-3 $ more expensive.”
In the last quarter they mentioned: “Missouri has continued to demonstrate strong momentum driven by our updated pricing strategy and enhanced marketing efforts.” (10-Q, Aug 2023). Which translates into we reduced our prices and made a ton of promotion, to increase attendance, it resulted in an increase of 32,6% paid attendance, while revenue increased only around 6%.
Furthermore, safari parks, in comparison to other amusement parks, only have very little opportunity to sell the attendees products within the safari, such as food or souvenirs.
#2 Error: Misjudgment of Managements capital allocation skills
Originally, I wrote: “All in all I believe that management is very well experienced and knowledgeable in the industry and are determined to grow the business and allocate the capital reasonably to increase long term shareholder value.”
First, I must say, that the CEO changed during my time as a shareholder. I think Lisa Brady, the new CEO, is doing a better job than the previous management, so she might be good in capital allocation and able to prove me wrong on my sale of my shares. However, the old management overpaid on the acquisition of the Texas park. And even more important, misjudged the park. They paid around $7m for a park that made around $2m in Revenue in 2021 and 2022 (both years it had a loss). That’s 3,5x sales, while $PRKA historically trades at 2,5x Sales, but is, in total, of higher quality than only the Texas Park.
I ignored this at the time I bought shares, because I thought, that the Texas park is capable of doing 20-30% margins - and to grow revenue at 10%.
#3 Error: I thought the Texas will become profitable
In 2021, I wrote “In my opinion, the new Texas Park is not as well located as the Georgia park, but much better than the Missouri Park. Even though there isn't a tourist attraction nearby, the park is close to College Station and a 2h drive away from Houston and Austin. Furthermore, the weather in Texas is quite good all year long. This is an important factor, which is already shown in the quarter revenues of Aggieland. 21% of the revenue was generated in Q1, Missouri only generated 12% of revenue in Q1. So, I believe that Texas will become a profitable park.”
However, now it has become clear, that the acquisition of this park was a complete failure. Now, management seems to be more confident of turning the Missouri park around, which has been struggling for years, then making the Texas park profitable.
From the recent 10-Q ”(…)We believe we are on a path to drive sustained profitability at our Missouri Park through a combination of growth in the core business as well as future adjacent development. We continue to closely monitor our Texas park and the marketing strategy as we work to build the brand and overall awareness, recognizing this park opened in May 2019 and remains in its infancy. However, the attendance build is slower than expected when we acquired this park in late April 2020.”
#4 Error: I overpaid on normalized earnings
Honestly, I could have walked away with a gain, despite all those mistakes, if I hadn't overpaid. The biggest lesson is to never overpay on normalized earnings. Everything else is just a pleasant surprise, but not needed in order to make money.
”Currently, the company is trading at 3,3 times revenue, 10x EBIT, 14 times Earnings and 17x Free Cash Flow.”
To start with, those are not really low multiples for a business that is not really growing that quickly. To make matters worse, those were the multiples of the inflated covid numbers, which proved to be not sustainable at all.
“To sum it up, in my opinion, Parks! America is an asset-light, highly cash generating, well managed and durable business protected by a local moat trading at a fair price.”
As I wrote, I didn‘t even thought, it would be a bargain, but a good business at a fair price. The problem is, that leaves no room for error, if the business is not good, but only decent, you may lose money. If the fair price is not fair, but slightly overvalued, you may lose money. You have to be very, very certain about your estimates, which is very difficult as an outsider. Therefore, my biggest learning, is never to overpay on normalized earnings.
PS: A small anecdote, after I published this article, I got to know Value In Special Situations - he told me, that he wouldn‘t understand the thesis and that I would pay a high multiple. I should have listened to him…
Disclaimer: Do not interpret anything above as financial advice. I do not hold a position in Parks! America, but may initiate one in the future again. The article was written for entertainment & educational purposes only.
Thanks for sharing. Taking a loss is painful, but as you mentioned, learning from your mistakes is important. Hopefully we can all learn with you.
Thanks for taking the time to write up a post mortem. I think there aren't enough post mortems being done by investors. Very instructive.