MTN - Vail Resorts, Inc.

[AdjustedEarnings]

This has been a company that comes up from time to time in the "value" circles. The stock has been expensive for the last few years but took a hit today following the announcement. The CEO is well regarded and his strategy with EPIC pass has been quite good and, now, replicated by competitors. But the market is not a 'growth' market and, as such, acquisitions have been necessarily combined with modest organic growth. Over the last few quarters the stock has fallen as people have worried more about IKON pass and other things. But there must be more to the story. Today's announcement didn't seem THAT bad, though the stock is down a lot. Most likely I'm missing something here as I'm new to the story... which brings me to the point of this post... could people knowledgeable on this name please provide some ideas as to what afflicts the stock other than IKON and general economic outlook, such that it has gone from almost 300 to 190? I'm beginning to do more work on this name and will post whatever I find. Thank you in advance!

[oddballstocks]

As an avid skier (hence the avatar..) I've followed them over the years.  MTN has made some interesting acquisitions in the Midwest in an effort to funnel more skiers out to their premier resorts out west.

 

I have had season passes to Ikon resorts in the past, and this year have a three day pass and a deep discount rate.  Also have a pass at a local place to ski weekly with the kids.

 

Personally I prefer Utah over Colorado, so Epic isn't in the cards.  But my take is this.  The sport is shrinking overall.  Resorts are trying to wring as much money as possible from the shrinking population of skiers/boarders.  Over the past five years prices have increased steadily, and I've noticed crowds have decreased.  There is speculation they've been increasing prices in an effort to thin crowds.  And if that's true it's possible they're at the point where increased prices don't add marginal dollars.

 

I'll say this, even 10 years ago skiing was big, to the point where you could visit a local hill and there would be a 45m wait for a chumpy lift.  I haven't seen that at all in the last few years.  And I ski more now than I ever did then.  Even locally lifts are always empty, there are few lines, it's a pleasant experience.  As a consumer I enjoy it, but I'm not sure it's healthy for resorts.

 

I hate to bring this up...but it's getting warmer.  And warm weather isn't great for ski resorts that aren't high.  It's finally cold in PA, but most places aren't 100% open yet, on Jan 11th..  Skiing is out of the mindshare by March 15th or so.  There's a small window where people think  cold -> ski.  Over the past few years local places have been making snow like crazy.  I know 15 years ago Colorado and Utah barely made any snow, now they're installing systems just like the east.  I don't know what the warming trend is going to be like, but if the west is anything like the east in 15 years they might need snow making across the entire mountain.

 

People ski when it's cold at their house.  Where I live we're 1,500 ft lower than the local resorts.  It can be 40 degrees here and 28 degrees in the mountains.  But people equate cold at home to cold in the mountains.  I've used this to my advantage to ski on plenty of "warm" days in the city where it's snowing in the mountains.  But resorts need new skiers, and friends will comment "why'd you ski this weekend? It was so warm.."

[KJP]

This has been a company that comes up from time to time in the "value" circles. The stock has been expensive for the last few years but took a hit today following the announcement. The CEO is well regarded and his strategy with EPIC pass has been quite good and, now, replicated by competitors. But the market is not a 'growth' market and, as such, acquisitions have been necessarily combined with modest organic growth. Over the last few quarters the stock has fallen as people have worried more about IKON pass and other things. But there must be more to the story. Today's announcement didn't seem THAT bad, though the stock is down a lot. Most likely I'm missing something here as I'm new to the story... which brings me to the point of this post... could people knowledgeable on this name please provide some ideas as to what afflicts the stock other than IKON and general economic outlook, such that it has gone from almost 300 to 190? I'm beginning to do more work on this name and will post whatever I find. Thank you in advance!

 

I believe part of the decline was that the stock was richly valued to begin with.  I'm lazy so I'm just going to copy the valuation paragraph from a VIC writeup of the stock a few months ago when it was at $254/share:

 

Based on a current share price of $254, Vail’s market cap is approximately $10.28 billion and EV is $11.74 billion. Based on guidance for FY 2019, which includes the recent acquisitions of Stevens Pass, Crested Butte, Okemo, and Mount Sunapee, the forward EV/EBITDA ratio is 15.8 and the forward free cash flow yield is 4.4%. While this is a relatively low yield, the free cash flow yield has mostly remained below 5% over the past five years. Assuming no more acquisitions and continued pricing power ahead of inflation, the stock could likely return 8% or 9% annually based on the starting yield and 3.5% growth. However, I consider this unlikely. If free cash flow continues to be recycled dollar for dollar into acquisitions and capital investment into existing resorts, the returns could be meaningfully higher. On the other hand, if acquisitions slow, MTN can use to free cash flow to repurchase shares or pay dividends. Given Vail’s growing free cash flow and its dominant position in North America, it will inevitably become more difficult to maintain the same pace of acquisitions (relatively to the growing size of the company.) However, there are still a number of large resorts that could be acquired, especially internationally.

 

 

As you mentioned, the stock has recently been even higher, and you can see what the multiples were at $300/share.  At those multiples, any concerns about future growth are going to cause significant declines, particularly in an industry that does not appear to be growing.  See here for data on annual U.S. ski visits:

http://www.nsaa.org/press/industry-stats/

 

 

[johnny]

I'll say this, even 10 years ago skiing was big, to the point where you could visit a local hill and there would be a 45m wait for a chumpy lift.  I haven't seen that at all in the last few years.  And I ski more now than I ever did then.  Even locally lifts are always empty, there are few lines, it's a pleasant experience.  As a consumer I enjoy it, but I'm not sure it's healthy for resorts.

 

Looks like you nailed the overall trend pretty well: http://www.nsaa.org/media/303945/visits.pdf

 

Peak of ~60M visits in 2007 and even 2010, and steadily declining to low 50s, which is where it was 30!! years ago. National data != site specific traffic, but it certainly feels like pricing (at tier 1 sites) has gone up way more than the 17% or so it would take to balance that out, right?

 

The 1%-ification of the sport makes it a very interesting business to evaluate. I've only gone snowboarding a handful of times, so hardly an expert. But I've always found it interesting how many Tinder profiles include pictures of the user bundled-and-goggled-up at Mammoth Mountain, which obviously conveys 0 useful information about the target other than class signaling.

 

[5xEBITDA]

Over the past few years local places have been making snow like crazy.  I know 15 years ago Colorado and Utah barely made any snow, now they're installing systems just like the east.  I don't know what the warming trend is going to be like, but if the west is anything like the east in 15 years they might need snow making across the entire mountain.

 

 

Is there a way to invest in snowmaking, public or private?

[Spekulatius]

I haven’t gone skiing for a while, but was surprised how high prices for day passes have risen. I know some folks who don’t go skiing  much any more because it has gotten prohibitively expense for the whole family. Maybe the resort owners just overexerted their pricing power. Look out below, when the economy weakens.

[Cigarbutt]

Disclosure:

-I've been into alpine skiing a lot in the last 30 years.

-been to some of resorts owned by Vail (Canada and US) but have skiied mostly in Eastern Canada.

-looked at some basic statistics to support personal anecdotal observations and the following opinions and looked only briefly at Vail's financials

 

There are long-term trends that have been, and will continue to be unfavorable.

-attendance has been trending down

-younger generations ski less

-snowboarding seems to be losing momentum

-the sport has partly evolved from a family setting to a social setting, which I evaluate to be less enduring

-resorts have had to invest heavily in artificial snow generation which is a likely driver behind higher than inflation rise in ski lift prices

-ski expenditures have become so large as to create a discretionary expenditure risk

-warmer weather, which is becoming a growing net negative

 

Year to year variability is a typical risk of weather-related businesses but, looking over the last 30 years, the changes related to warmer weather have been quite spectacular (shorter season, raining episodes even in January, less natural snow, need to invest in artificial snow infrastructure). For instance, we used to ski a lot during the Christmas holidays and now we typically don't plan for it. Also, in the past, we frequently planned ski vacations during school break (first week of March where I live) and now, we plan last minute, if at all in case spring comes early. Hopefully, we'll be able to go to Vermont this year. :)

 

[KJP]

 

Year to year variability is a typical risk of weather-related businesses but, looking over the last 30 years, the changes related to warmer weather have been quite spectacular (shorter season, raining episodes even in January, less natural snow, need to invest in artificial snow infrastructure). For instance, we used to ski a lot during the Christmas holidays and now we typically don't plan for it. Also, in the past, we frequently planned ski vacations during school break (first week of March where I live) and now, we plan last minute, if at all in case spring comes early. Hopefully, we'll be able to go to Vermont this year. :)

 

This is a significant issue.  Large resorts make their money from destination skiers, not high-volume local users.  You can see that in MTN's most recent results.  Most people would think twice about booking in advance a $5,000 - $10,000 week-long family ski trip if they weren't sure there'd be good snow conditions during their particular week.  I suspect the weather in Hawaii is much more reliable.

[JayGatsby]

I side with the "previously overvalued" more than some systemic issue. Vail has as close to a monopoly on the Colorado market as they'll legally ever really get. The problem a bit is their roll up strategy is losing importance. Combining as many of the I70 resorts as they could was a brilliant strategy. Almost everyone I know in Denver who skies has the epic pass. Their more recent strategy of adding mountains all around the world really does very little to the average Epic Pass holder though. Not many people fly around trying as many resorts as they can. With Aspen/KSL buying stuff under IKON now it's a competitive market to be buying.

 

Over the last few years when I've lived in Colorado I haven't seen any noticeable change. It feels more crowded than it's ever been. The only thing keeping more people from going is the infrastructure doesn't support that. For better or worse, I've definitely never heard the words "thinning" and "crowds" used to describe a Vail resort here. Most people complain that I70 traffic just keeps getting worse.

 

I don't think their pricing is expensive. It's just tiered. I pay less than $700 for a season pass that gets 10 days at Vail/Beaver, and unlimited at Breck and Keystone. A season pass to Breck is like $500. Keystone is less than $400. So even a week of skiing isn't ridiculous per day. The only people paying $200 for a walk up price at Vail are also paying $1000 for a hotel room and at least $400 for transport. It's an expensive activity to do just for a weekend. That does make it challenging for someone to try out and get hooked, so that strategy could definitely hurt them over time.

 

I'd love to own it, but even at today's prices it isn't cheap. Rocky Mountain region on that data table is basically the best it's ever been. But for their prior valuation to make sense they would have had to have a great opportunity to start rolling up resorts outside of that market.

[Cigarbutt]

^JayGatsby's post triggered a re-assessment.

 

In the region where I typically ski, there has been some consolidation activity with smaller and less profitable operations being closed or acquired by larger players and this may apply industry-wide. It definitely feels like the larger and more "popular" centers are as much if not more crowded than before.

 

The industry MTN is in reminds me of the movie theatre industry ie there are unfavorable demographic trends and the "consumer" has more options including staying at home for entertainment but the industry has adapted, and focused on the "experiential" side. In this context, the movie theatre industry has been able to compensate lower attendance and increase revenues by being able to extract more from the continuing consumer. In the ski industry, barriers to entry are quite high and consolidation activity may make sense in selected markets.

 

MTN acquired Whistler Blackcomb in 2016 (75% of it) which I've been to a few times and will try to analyze the purchase price to see if the above-mentioned factors apply on a value basis. So, will keep it on a secondary watchlist but conclude, at this point, that the market value is still above intrinsic value by a significant margin.

[chesko182]

Bought a starter position today at $130ish, no doubt this will temporarily get hit from all this corona debacle on the travel industry, but I think on a normalized FCF yield it's around 10% which is pretty attractive for a business like this which has grown pretty nicely, has the biggest scale (on a high fixed cost business) and acquisitions have been quite accretive.

 

The demand side of skiing seems like it oscillates between 50-60mm skiiers, very dependent on weather and the economy. More geographic diversification should serve them well, and more pass products they sell the more it looks like a subscription business. I bought my first season pass for next year now that they have mountains close to where I live, plus I can go to Colorado, Utah, Canada as well (which I usually do once a year). Interesting to see how they expand into Europe and Asia/Japan.

 

The supply side is what makes this really interesting, limited competition (IKON being the main one) and pretty much impossible to start a new ski resort from scratch. Favorite part of the 10-k:

 

There is limited opportunity for development of new destination ski resorts due to the limited private lands on which ski areas can be built, the difficulty in obtaining the appropriate governmental approvals to build on public lands and the significant capital needed to construct the necessary infrastructure. As such, there have been virtually no new destination ski resorts in North America for over 35 years, which has and should continue to allow the best-positioned destination resorts to benefit from future industry growth.

 

[Cigarbutt]

Market valuation has come down and yesterday MTN (along politicians) announced a temporary cessation of activities. Whistler-Blackcomb, by far, is the most attractive ski resort for Asian skiers so the economic impact perception may be significant.

https://www.thedenverchannel.com/news/national/coronavirus/gov-orders-all-colorado-ski-areas-to-close-under-covid-19-threat

 

The basic idea (moat) is that Vail is there to stay. It is likely (although variably and to a lesser extent compared to the last low-hanging fruits years) to continue to grow market share in a mature and even declining overall market. It is reasonable to project that, in the longer term, demand decrease will be outpaced by supply decrease. The top management can probably manage any scenarios and have done well (strategy and vision wise) on the EPIC pass and the acquisition fronts. They also have put in place a pricing premium strategy that is segmented and that captures well consumer surplus. The valuation below comes with some assumptions. First, normalized earnings are adjusted down by 10 to 15% because of the possibility that the discretionary nature of the premium product will have a harder time going forward (the typical "guest" tends to report a very high income). Second, after reviewing some stuff, normalized earnings are adjusted down to take into consideration climate change (shorter seasons, more rain, less snow...implying larger capex to improve conditions with only partial pricing power for that aspect). Third, the PE multiple used is kept relatively low given what I see as a more conservative valuation of leveraged companies going forward.

 

As far as valuation, this is not a natural selection for deep value people but recent developments may arouse interest if long term patience is available.

One could go with a free cashflow yield, an EV/EBITDA-type or even a DCF type of falsely precise number but here's simplified and grossly adjusted PE version.

Evaluating present normalized earnings (EPS) at 8.20 and adjusting for the above assumptions: entry point = +/- 75-90$ per share.

 

Just a while ago, this analysis looked completely stupid and now it looks only stupid. It's reasonable that MTN's market value would go down by 70% once a recession is recognized and MTN traded as high as about 250 just a short while ago and almost touched 300 last summer.