Description

Whistler Blackcomb is the most visited ski resort in North America. Vail and Breckenridge are the top two in the US and Perisher is number one in Australia. In addition to operating the resorts, MTN also provides ancillary services such as ski school, equipment rental, retail, dining, as well as owning and/or operating various hotels and condos.

After being founded in 1962 by a WWII veteran of the 10^th Mountain Division of ski troopers, the Vail resort was purchased in 1985 by the conglomerate Gillett Holdings (which also owned a meat packing plant and three TV stations). Gillett had fallen on hard times by the early 1990’s when it fell into bankruptcy and Apollo Management began buying its debt. After the bankruptcy Apollo took control of Vail in 1992, which owned two resorts at the time, Vail and Beaver Creek, both in Colorado. Apollo’s primary analyst on the Gillett bankruptcy was a 25-year-old named Rob Katz, who would remain as Apollo’s primary overseer of Vail during its ownership.

In 1996 Vail agreed to purchase two Colorado resorts from Ralcorp Holdings, Keystone and Breckenridge. As part of the transaction, Ralcorp held on to 25% of Vail’s stock which went public shortly after the transaction closed in early 1997. Ralcorp had the right to appoint two directors to the company’s board, one of which was Bill Stiritz. Mr. Stiritz (see the writeup on Post Holdings) served on the board from 1997 until after Ralcorp had sold its position and he stepped down in 2009. While Vail was owned by Apollo, in addition to buying Keystone and Breckenridge, it purchased Heavenly in Lake Tahoe, Nevada. Apollo held an interest in Vail until it distributed the last of its shares to its limited partners in 2004.

When Vail went public in 1997, the company set up its first formal board of directors, which included Rob Katz. Mr. Katz was elected chairman of the board in 2002 and he became CEO in March 2006 at the age of 39 when Vail’s CEO retired. At that time, the company owned Colorado’s Vail, Breckenridge, Beaver Creek, and Keystone and California’s Heavenly. When Mr. Katz took the helm, Vail’s stock price was was $33 compared to $250 today, having compounded at 18% annually over the past 12 years. While the stock’s valuation has risen over this time, the rising price is mostly a reflection of the success of the business and its value increasing over time.

 

Business

 

One Katz’s first moves as CEO was to move the company’s headquarters from the Vail area two hours away to the Denver suburbs. The decision was extremely unpopular with employees, many of whom left the company, but Katz believed that the business needed to be taken more seriously in a more professional environment. “The rest of the company basically is throwing a big party, and the corporate office can’t really be in the middle of that party,” Katz said. “As a public company, it’s just tough...… So, to me, I felt like I wanted to have every single part of the company live up to the same excellence that our guest service and our mountain folks delivered.”

In addition to making unpopular decisions at the onset of his leadership, Katz has also proven to be an innovator. Vail revolutionized the ski industry with the introduction of the EPIC pass which was introduced for the 2008/2009 season for an introductory price of $579. The most expensive version of the pass gave skiers the chance to ski at all of Vail’s resorts on an unlimited basis. Especially for frequent skiers, the pass afforded both huge savings and more resorts to visit. Prior to this, a season pass that included only Vail and Breckenridge was $1,800 and individual season passes for many high-end resorts are still in that range. A one-day pass for Vail is approximately $200 during peak season compared to the current EPIC Pass maximum price of $949. There are numerous types of passes which provide varying levels of access to all or some of the resorts at various price points.

The EPIC Pass dramatically changed the way in which lift tickets are sold in the industry and it was a creation that Vail deserves credit for. “One of the challenges of the ski industry historically was always weather,” Katz says. “If it snows, you make a lot of money, and if it doesn’t, you don’t, and that’s just life. The question was whether there was a way to address that. What came out of that was the season pass.” The pass provided stability for the company by transferring more of the risk for poor weather to the skier in exchange for a reduced price for a lift ticket. It was a huge win-win. Over 40% of lift tickets are sold before the ski season begins to skiers in all 50 states and over 80 countries. In FY 2018, pass products generated 47% of total lift ticket revenue. The pass has turned what was a local product into a global one all the while keeping skiers within the Vail ecosystem and increasing long-term loyalty.

In addition to Vail’s 18 resorts, the most comprehensive version of the pass includes access to several affiliated resorts in Colorado, Japan, and Canada. In addition, when skiers buy the pass they feel compelled to maximize its value by using it as frequently as possible. And when they do they spend more money at the resorts on things like food, lodging, ski gear, etc. So, the pass is about more than just managing weather risk and increasing the number and loyalty of skiers; it is also about getting those skiers to the resorts as frequently as possible to clothe, teach, feed, and shelter them and hope that they bring their friends.

In addition to the EPIC Pass, Katz also had another innovation which has placed MTN in a very strong competitive position. A few years ago, the company began using radio frequency identification (RFID) technology in its passes which enabled information sharing on a massive scale. While Vail was not the first resort to use RFID technology, it was first to use a variation of the technology which led to much longer read ranges.  The program is called EpicMix and it is an online and mobile app with a wide range of functionality including:

·         Tracking variables such as total vertical feet, course times, routes, chairlift activity, etc.

·         Current wait times for lifts which can help in planning routes

·         Resort navigational guides

·         Checking mountain web cams and snow/weather conditions

·         Tracking progress in ski and snowboard school

·         Racing against friends and family

·         Sharing photos and other data on social media

There are photographers stationed at various locations throughout the resorts to capture pictures of the skiers, which are then linked to the app. Skiers can post these images to social media along with any other information gathered by the app. Vail has successfully provided its skiers a way to broadcast their achievements and adventures throughout social media which is the best form of advertising the company could hope for (and it is very cost effective). The company doesn’t report the exact numbers of EpicMix users but has said that it is in the millions (out of the 12 million+ skier visits in 2018). MTN is very well positioned to capitalize on the trend of sharing experiences via social media. In addition to tracking individuals, Vail can also use the data to get a better understanding of how skiers move around and use the mountain. For example, are there distinct movement patterns between various age groups or genders? Which lifts or terrain park gets used most often and when?

However, EpicMix is just one aspect of MTN’s ability to collect data on its skiers. Vail uses EpicMix to track the movement of its skiers and then use that data to provide better service as well as marketing. In addition to EpicMix, the company has also invested a lot in capturing and analyzing the spending patterns of its skiers who purchase the Epic Pass. When skiers purchase the pass, MTN can garner key demographic information including age, gender, home address, email, etc. and then, during the ski season, MTN tracks when and where the person skis, dines, lodges, etc., essentially having a comprehensive viewpoint on spending patterns. When this data is also paired with data from EpicMix, Vail has a treasure trove of information it uses to personalize marketing and special offers to its customers.

Acquisitions

Over the past two decades, annual growth in the number of skiers in the US has been roughly flat, with variations primarily due to weather. As the skiing population isn’t growing, and is decreasing on a per capita basis, Vail’s primary means of growth has been acquisitions. Since becoming CEO, Katz has led the acquisition of Whistler in British Columbia, Northstar and Kirkwood in Tahoe, Utah’s Park City Mountain Resort (Park City and Canyons, combined), Afton Alps in Minnesota, Mt. Brighton in Michigan, Wilmot Mountain in Wisconsin, Perisher in Australia, Stowe and Okemo in Vermont, Mt. Sunapee in New Hampshire, Steven’s Pass in Washington, and Crested Butte in Colorado.

Each of these acquisitions has been made since 2008 and part of the reasoning behind each of them was enhancing the network value of the Epic Pass. As each new resort is added, more skiers are brought into the network and the skiing options for existing pass holders increase. As the number of destinations increases, the pass becomes a better value to more skiers. For example, Vail purchased three smaller resorts in the Midwest which are close to the large metropolitan areas of Minneapolis/St. Paul, Chicago, and Detroit. These ski resorts, although not large enough to move the needle on their own, were an attempt to bring weekend skiers from these larger cities into the Vail network. For example, when MTN purchased Wilmot it was able to offer a lower-priced season pass (specific to Wilmot) but also the EPIC Pass at a slightly higher cost which gave skiers from Chicago not just the option to ski at Wilmot but at any of Vail’s resorts. In the past, if a Chicago family took a ski vacation in California or Colorado, they would have to purchase additional lift tickets to the mountain of their choice. But now, that family who had historically bought the Wilmot season pass is incentivized by the savings to purchase the Epic Pass and stay within the Vail network for their winter skiing vacation.  And as the network grows, more skiers are brought in and existing pass holders have more options. It was this same logic that led Vail to purchase three resorts in the Northeast starting with Stowe in 2017, which gave them access to skiers residing in New York City and Boston. Prior to the acquisition, a Stowe season pass was $1,860. The recent acquisition of Steven’s Pass in Washington will bring Seattle skiers into the fold. Giving pass holders access to such a valuable and growing network of resorts has helped build and maintain customer loyalty.

In another example, Whistler has the highest visitation of Asian skiers of any resort in North America which will likely be a future avenue for growth. As these skiers purchase the Epic Pass, they will be introduced to the Vail network and hopefully visit additional resorts. Whistler also has a robust summer season which Vail can learn from as it rolls out summer programs at other resorts including Vail, Heavenly, and Breckenridge. These summer activities include scenic chairlift rides, mountain biking, 4x4 tours, hiking, ropes courses, zip lines, alpine slides and roller coasters, etc.

As revenue increases over time during the summer months (from currently small levels), the business will become less seasonable. The acquisition of Perisher in Australia also served to increase revenue during the summer months in North America as well as funnel Australian skiers to Vail’s other resorts during Australia’s summers. On average over the past decade, Vail has acquired about 4% of its market cap per year. However, this has not been consistent year to year as the deals for Whistler and Park City were much larger than average.

Once MTN purchases a resort, it will often immediately begin to upgrade the facilities including improvements such as new higher capacity lifts, improved snowmaking and grooming equipment, facility remodeling where necessary, etc. Much like an upscale hotel or restaurant, resorts must continually invest to keep the facilities fresh and promote the desired image. Given Vail’s robust cash flow, access to capital, and diversified portfolio, it can afford to invest heavily in its resorts as compared to smaller or stand-alone resorts which may be capital constrained and more subject to the risks of adverse weather. After Vail acquires, in addition to a lower cost season pass, skiers also get to ski at an upgraded resort.

Financials

Over the past decade, resort revenue (which includes everything except real estate sales) has compounded at 9% per year. This can be broken down into 7% growth in annual skier visits and 2% growth in revenue per skier visit. The company doesn’t report organic growth in skier visits, so it is impossible to know what growth has been excluding acquisitions, but it has likely been low single digit at best. From 2004 through 2008, no acquisitions were made, and skier visits grew by 2.4% over that period. Lift ticket revenue divided by skier visits, which was $71.30 in FY 2018, has grown at 4% annually over the past decade as the company has typically increased the prices of its passes ahead of inflation. However, over that same period, revenue per visit for ski school, dining, retail/rental, and lodging has compounded at 2%, 3%, -1%, and -2%, respectively. Note that the lodging revenue has been impacted by the mix of lodging options at the acquired resorts as well as certain divestitures that have taken place over the past decade. The average daily rate and revenue per available room (RevPAR) for the lodging segment has increased at rates of 3% and 2% respectively over the past decade.

Lift ticket revenue, which includes revenue from passes, has increased as a percentage of total revenue since the EPIC Pass was first introduced, as has revenue from ski school and dining to a lesser degree. Vail has made changes to its lodging portfolio and management arrangements in past years which has resulted in lodging revenue declining relative to total revenue. As there are significant fixed costs associated with maintaining the slopes and related equipment, infrastructure, and staffing, the growth trajectory of pass revenue has led to both an increase in margins and a less volatile revenue stream as more passes are sold prior to the start of the season.

 

The EBITDA margin has increased in recent years as the company has grown and increased its scale. As a percent of revenue, the mountain EBITDA margin (mountain includes everything except lodging and real estate) has increased by nearly 800 bps. over the past five years. The margin improvement has been due to declines (as a percentage of revenue) in labor costs, retail costs of sales, and general and administrative costs. Over the past five years the number of skier visits per employee (including seasonal workers) has increased by 4% per year. The EBITDA margin in FY 2018 rose to 34.3% for the Mountain segment and 30.8% overall.

Going back to 2005 (which is as far back as I went), Vail’s revenue increased every year except for 2009. Revenue and skier visits declined by 10.3% and 5.3%, respectively, in the aftermath of the financial crisis. Lift ticket revenue per skier visit declined by 3.2% as the mix of skiers changed, thus fewer skiers paying lower prices (on average) accounted for most of the revenue decline. RevPAR declined 12.5% from 2008 to 2009 as lodging took a significant hit. It took three years, until 2011, for revenue to surpass the 2008 peak although this was aided by acquisitions. Lift ticket revenue per skier also surpassed the 2008 high in 2011. EBITDA declined by 22% in 2009 as there was fixed cost deleveraging and the company declined to carry out layoffs of year-round employees in spite of the downturn. For a period after the crisis Katz took no salary and convinced employees to take a reduction in pay in return for stock and job security.

Cash flow from operations has been positive every year for the past decade and free cash flow was positive in every year except 2010. Free cash flow would have been significantly higher (and positive) in 2009 and 2010 had it not been for investments in real estate development that had to be funded. Vail had committed significant capital to investing in land and development projects prior to the financial crisis but the company is no longer engaged in direct development. Free cash flow in FY 2018 totaled $411 million and will likely grow to greater than $450 million in FY 2019 given growth in the business and acquisitions made after fiscal year-end 2018.

Vail’s balance sheet is arguably under leveraged. Historically MTN’s net leverage ratio has averaged near where it is currently, at 2.1x. In FY 2018 interest was covered by operating income by nearly 6.5x and annual free cash flow could pay off all debts within three years. In addition, a significant portion of the debt is a long-term capital lease related to the Canyons acquisition which will be paid out over decades. The additional debt it has added as EBITDA has grown has been used to fund dividends and stock buybacks. Given the relative stability of its cash flows, the company has been conservatively financed.

Returns

Over the past seven years Vail has spent approximately $1.5 billion on acquisitions and $860 million in capital expenditures. Historically capital expenditures have ranged from 7% to 9% of revenue, or over $10 million per resort in FY 2018. Over this same period, Vail’s EBITDA has increased by $400 million resulting in a pretax return on these investments of 17%. Importantly, the total investments of approximately $2.3 billion have been funded nearly dollar for dollar by Vail’s cumulative cash flow from operations over the past decade of $2.4 billion. Free cash flow per share has compounded at 19% over the past decade, which nearly equals the annual compound shareholder return.

In hindsight, it’s clear that Vail has been in the envious position of being able to recycle all its cash flow into high return investment opportunities which has led to high rates of compounding. Perhaps MTN hasn’t borrowed much money because it hasn’t needed to. Vail has historically paid less than the typical industry multiples of 8 to 9 times except for Whistler, for which it paid 11x. Given Vail’s geographic diversification, high level of pre-season pass sales, network benefits, robust cash flow and financial strength, it has lower cost of capital than pretty much any resort that it could purchase. Thus, the cash flows of the acquired resort are valued by the market at a higher multiple and Vail can invest in its acquisitions to improve its long-term return potential.

Valuation

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.

 Risks

·       Given that Vail trades at a 4.4% free cash flow yield and 15.8x EBITDA, the price is not inexpensive. The multiple could decline, sharply so in a recession. During the financial crisis, the stock lost over 70% of its value. However, it is important to remember that the business itself didn’t struggle nearly to extent implied by the price drop. While the multiple could decline, if the business can continue to compound in value in the future then investors will still do well. Vail’s debt level is not high enough to endanger the viability of the business in the event of a severe downturn.

·       In recent years Vail has allocated a significant amount of capital to acquisitions, including $1.09 billion for Whistler, which represented over 16% of its market capitalization as of early 2017, and these acquisitions have created significant value for Vail’s shareholders. However, Whistler was the largest ski resort in North America; there aren’t many more Whistlers available for MTN to acquire. As the company continues to grow, acquisitions will have less of an impact relative to the size of the company. And at some point, regulators may prevent MTN from buying more resorts in the US. Excluding Whistler and Perisher, Vail’s market share of US skiers is likely north of 15% of the total 53.3 million skier visits in 2017/2018.

·       There are many options for acquisitions abroad and Vail will likely pursue this path. However, acquisitions outside North American pose greater risks as the benefits to being included in the Epic Pass network are less evident. Large acquisitions always pose risks and Vail has only made one of them in recent years. At least the company has had the experience of buying Perisher and it will be able to mine its vast customer data to determine which international locations could most benefit from being placed within the network.

·       While Vail was the pioneer behind the large-scale season pass, others have followed in its footsteps. In 2017, a joint venture between KSL Capital Partners and Aspen Skiing Company called Alterra Mountain Company acquired Mammoth Resorts and Intrawest Resorts which pulled together Steamboat, Winter Park, Squaw Valley, Mammoth, June Mountain, Big Bear, Stratton, Crystal Mountain, Snowshoe, Tremblant, Blue Mountain, Deer Valley, Solitude, and CMH Heli-Skiing. Combined, these resorts have over 6 million skier visits per year, or approximately half of Vail’s skiers. Alterra offers the IKON Pass for $1,049 which offers unlimited access to Alterra’s resorts plus limited access to 22 partner resorts including Aspen Snowmass, Jackson Hole, and other international resorts. While this alternative pass certainly creates competition for Vail, the fact that it is more expensive than Vail’s pass and has fewer unlimited skiing options highlights the value of the EPIC Pass. In addition, to the extent that the IKON and EPIC Pass along with other passes such as the Peak Pass (from publicly-traded Peak Resorts and includes 10 eastern resorts) draw skiers away from smaller and unaffiliated resorts, the pass providers can gain market share.

·     If the earth’s climate continues to warm or if the rate of warming increases, resorts at lower elevations may have irregular or diminished snow fall. Vail has tried to mitigate this by geographically diversifying its resorts and introducing summer activities at certain resorts, but the long-term risk remains. Skier visits declined 12.1% in 2011/2012 due to the weakest snowfall in 20 years, especially at the Lake Tahoe resorts.

Positives

·       Robert Katz, age 51, has been Vail’s CEO since 2006 and has been involved with the company for over 25 years. Under his leadership Vail has performed exceptionally well and generated very strong returns for shareholders. Katz has proven to be an astute allocator of capital by making accretive acquisitions in addition to occasional, well-timed stock buybacks. According to the most recent proxy, he owns shares valued at nearly $260 million so he is well-aligned with equity shareholders.

·       There have been very few new ski resorts built in the US in recent decades and the total number of resorts has declined from 735 in 1984 to 472 in 2018. Large blocks of land that are suitable for skiing and available for development are very rare and it would be a long and difficult process for a new resort to pull skiers away from their favorite mountains where loyalty has been developed over many years. Although the number of skiers has been relatively flat over time, those skiers are being divided up by a smaller number of resorts.

·       Vail owns several of the largest and most visited resorts in North America. Even compared to Alterra, Vail’s skiable acreage per resort is much larger. These assets are rare, irreplaceable and have long-term staying power. Unless there are dramatic and unexpected changes in weather patterns or land lease policy from the National Forest Service, skiers will most likely still be hitting the slopes at Vail 30 years from now, just like they were 30 years ago. Given the oversight of Rob Katz, the continual capital improvements, and the low leverage attached to the business, it is unlikely that the value of the equity could be permanently diminished.

·       In addition to owning iconic resorts, Vail has also managed to build a substantial database on the spending patterns and preferences of its skiers, so it can better target them with appealing offers as well as more efficiently manage its resorts. As Vail is the biggest resort in North America, it has the most data and that data grows as more resorts are brought into the network.

·      While the stock price is not cheap, it is not expensive either. Given the staring free cash flow yield, pricing power, financial strength, the value provided by its season pass and the likely upside from future acquisitions, I believe the stock will compound at a double-digit rate going forward with relatively low risk. I think you are paying a fair price for the business as it exists today with lots of potential future upside given the possibility of acquisitions.

Catalyst

•  Continued acquisitions
• Growth in free cash flow per share