You cannot create nor move mountains. Therefore, Vail Resorts is unique.
Background
Vail Resorts (MTN, Financial) owns and runs ski resorts. It has the No. 1 most visited ski resort in North America (Whistler Blackcomb in Canada), and six out of the top 10 in the U.S. It also has about 15% of market share in North America. The following table lists its assets.
Vail makes money from lift tickets and related services such as ski school, dining and retail. The majority of the revenue and almost all profits are derived from these activities, which form the mountain segment. The rest comes from lodging and real estate development.
Vail’s major shareholders are:
Why is the stock attractive as a long-term holding?
1. A superior, non-replicable assets in an industry with a high entry barrier
Vail owns some of the best ski resorts in North America. No new ski resorts have emerged in the U.S. in the last 35 years due to limited supply of private land suitable to skiing and snowboarding, the difficulties of obtaining government approval to build on private land and large capital needs. This makes the existing resorts non-replicable assets, especially the large, popular ones that enjoy good weather conditions suitable for snow sports.
2. A young and strong CEO who has a proven track record of innovation and successful mergers and acquisitions
Vail is run by CEO Rob Katz. Katz graduated from the Wharton School at the University of Pennsylvania. As one of the early employees of private equity firm Apollo, Katz was involved in Vail as one of his portfolio companies since Apollo invested in Vail in 1991 (Apollo sold its stake in 2002). He became a board member of the company long before he became the CEO in 2006.
Since he became CEO, Vail invented the EPIC pass in 2009, which is probably the biggest innovation in the sleepy ski resorts industry. The EPIC pass is a very affordable seasonal pass that allows skiers to play on multiple mountains in Vail’s portfolio. Initially, investors were skeptical of the EPIC pass because it offered unlimited access to all Vail mountains for only $579 in 2009, while a single lift ticket could be as much as over $100. But time has approved the pass is a huge success. The price of the EPIC pass has been raised to $949 for the 2019 to 2020 ski season. The effective ticket price was lifted from $49 in 2008 to $71 in 2018. The pass not only attracts more skiers to Vail’s mountains but also reduces the volatility of the revenue due to variations in snow conditions. Seasonal pass sales of lift ticket sales rose from 25% in 2008 to almost 50% in 2018 while the lift ticket sales rose from 44% to 51% of total mountain revenue.
After the EPIC pass became successful, Katz went on to buy more resorts to enlarge Vail’s portfolio. Starting in 2010, Vail expanded its portfolio of resorts from the original five to 17, including Whistler Blackcomb of Canada, the most visited ski resort in North America, and Perish in Australia. More diversity in assets means more choices for skiers, which makes the EPIC pass more attractive.
The following charts demonstrate the successes of Katz’s strategies. Katz has transformed Vail into a large-scale, professionally run international ski resorts with pricing power, rising margin and rising returns on investment. At 50 years old, he has a long way to go.
3. Strongest player in a very fragmented market
The opportunity for Vail is still large. Ski resorts are mostly operated as mom-and-pop shops. There are 770 ski areas in North America and 470 in the U.S. What Vail owns is just a fraction of what is available. As the largest player in the industry, it has only 15% of market share in North America. In addition, there are certainly acquisition targets in ski resorts in Europe and Asia that could be integrated into Vail’s portfolio at the right time.
Risks
1. Good acquisition targets of meaningful size may be harder to come by.
Vail already owns many of the best assets in North America. Future expansion in the continent could be limited, and international expansion has higher risks.
2. EPIC pass now has a strong competitor.
Other ski resorts started to copy Vail’s EPIC pass. In the 2018 to 2019 season, a group of ski resorts started to offer a competing product called the IKON pass. IKON pass’ geographies are different from EPIC's, but the ultimate impact of this entry of a very strong competitor remains to be seen.
3. Vail cannot control the weather nor the economy. When there is no snow, there is no skiing. When the economy is weak, there are fewer people going to spend several hundred dollars a day skiing from mountain tops. Earnings volatility can bring stock volatility.
Valuation
Vail is priced above its historical range, reflecting the investors' approval of its assets and management. Because Vail has bigger scale and more diversified asset with more stable revenue due to the EPIC pass, the stock deserves higher than historical average valuation, although 12-15x EV-Ebitda is a more appropriate price range than the current 16x.
Vail does not have a good comp. Its peer group below is formed using the group of companies that Vail based its executive compensation upon. These companies are mainly casinos, cruise lines and hotels. Although they share the same level of sensitivity to the economy, the majority of them are different from Vail in terms of quality of assets. Vail deserves a premium to this group due to superior asset quality and higher pricing power.
Vail originally guided Ebitda between $718 million and $750 million for fiscal year 2019 ending in July. It lowered the guidance to $690 million to $720 million after the second quarter ending in January due to bad snow conditions. EPIC pass can be expected to grow pricing by about 5% a year. Margin expansion and leverage could add 50 to 100 basis points of Ebitda growth. Therefore without M&A, Vail should be a sub-10% Ebitda growth company. Here, $730 million as normalized Ebitda and $700 million as depressed Ebitda is used.
With a share price around $218, the stock appears expensive. I would look for entry point at $180 to $200. But I regard this stock as a good long-term investment and will buy on the dip.
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