I very much value scarce and unique investments. One of the first economic lessons we tend to learn as kids is that the more rare something is, the more it is worth. This is something you probably learned quickly if you ever collected or traded something like baseball cards when you were younger. These are Econ 101 supply and demand basics.
Last Friday we initiated a new investment position in a company I have long followed and admired but was never willing to pay the price of its premium valuation. The price of the stock has fallen nicely over the past few months, as fears of an economic slowdown rattle the markets, and hit the first level I was targeting to initiate the position. This company is Vail Resorts (MTN), an owner and operator of ski resorts, lodging and real estate.
The Risks
Before diving into all the things I love about the company, I will mention that skiing is obviously a VERY discretionary (and not cheap) activity. This means that the business is cyclical and the stock usually gets hit pretty hard during recessions. If the global economic picture continues to deteriorate, I do expect the stock to fall further. However, I’m hoping this happens. I’ve started with a smaller position relative to what I’d be willing to make it with the hope to increase it at lower prices.
The Company
Vail Resorts operates under 3 units: Mountain (recreational activities like skiing/snowboarding, zip lines, etc.), Lodging (hotels and condos around their mountain resorts) and Real Estate development. The company has expanded over the last 15 years by acquiring other resorts to now include over 15 locations in North America and 1 in Australia. They own 5 of the top 6 most visited resorts in North America, including Whistler Blackcomb, Breckenridge, Vail, Park City and Keystone, and the #1 most visited in the Southern Hemisphere (Perisher in Australia). In addition to the resorts in the image below, they recently closed on the acquisition of 4 more: Okemo in Vermont, Mount Sunapee in New Hampshire, Crested Butte in Colorado and Stevens Pass in Washington.
The Opportunity
Given the difficult nature of obtaining government approvals and the cost to make a ski resort, they aren’t making them anymore. In fact, there have been virtually no new destination ski resorts in North America for over 35 years! This means that competition on the supply side of the equation is limited to existing resorts only. Vail owns the premier resorts in North America, making this a truly one-of-a-kind asset with limited competition in general and virtually no competition at the highest level. There’s only one Vail, there’s only one Breckenridge, and there’s only one Whistler Blackcomb. The time and money it would take to create a new world-class ski resort in North America would be hundreds of millions of dollars and would take at least 10 years. This means assessing the long-term opportunity comes down to just the demand side of the equation – the long-term trends for skiing and snowboarding.
There are just shy of 10 million active skiers/snowboarders in the US (about 3% of the population) and North American skier visits totaled 72.7 million in the 2017/18 season. The total number of skiers have remained relatively stable over the last 20 years. While there is definitely room to increase the number of skiers, I’m not expecting that trend to change anytime soon. However, I also don’t see the number dropping off either. In my view, future growth for Vail Resorts will come in 3 ways: 1) acquisitions, 2) price increases, and 3) international network expansion (getting foreigners to visit the US).
Business Strategy
As I mentioned above, the primary strategy of the company over the last 15 years has been to build a network of resorts through acquisition. In 2008, they shook up the ski industry by introducing the Epic pass which gives skiers unlimited access to any resort in the network. The more resorts they acquire or partner with, the more attractive the pass becomes, creating a “network effect” of growth as more skiers are attracted to the pass. And Vail is now expanding the pass by adding resorts that they do not own (primarily in Japan and Europe) to broaden the network internationally. This will also bring international travelers to Vail’s US resorts which helps the lodging, restaurants, etc. The expenses are relatively fixed so each additional skier the company can get to come to a resort is highly profitable to the company. Europe, by far, has the most ski resorts and skier visits in the world. This represents a significant long-term opportunity for the company in terms of network expansion and eventually acquisitions.
In terms of competition, Peak Resorts is the only other publicly traded ski resort operator in the US but they are 1/100th the size of Vail in terms of market cap and their resorts are mainly East coast and do not compare in quality in my opinion. Most of the other well known high-end destinations, like Aspen, Jackson Hole, Killington and Big Sky, are still independently owned. However, they have been forced to band together to create a competing network pass at a similar price. This is the main competition for Vail but I view it as more of an industry duopoly that works together to increase the number of skiers than anything else. Both passes are priced similarly so it’s not like one has a major advantage over the other on price and it’s difficult to pull skiers away from other resorts. Skiing is one of those family vacations where you tend to go back to the same resort every year as a tradition, or you simply go to the only resort that’s close by. The main differentiator comes down to experience and with this I give Vail the advantage because they have the resources as a large public company to invest in their resorts to make the entire experience uniform across their network.
One of the biggest issues that ski resorts have always faced is weather. Unusually warm or light snowfall winters have really hurt resorts in years past. But this was one of the main reasons for creating a season long pass. This turns their revenue into more a recurring revenue structure and significantly reduces the risk of bad weather as passes are purchased before the season begins. The company has also been investing in summer activities to utilize the land and increase revenue during the out-of-ski season months. Additionally, the purchase of Perisher in Australia has helped to smooth the seasonality as well since their winter is our summer.
Technology and data is also an important focus of the company now as a way to better understand their customers in terms of travel, spending patterns and customer loyalty. With this, they’ve gained insights that have increased Epic pass sales and higher customer satisfaction as they’re able to personalize a customer’s experience. They have a very user-friendly app with helpful resort information and personal skier stats. They just unveiled a new Mountain Digital Assistant (think Siri or Alexa but with all sorts of resort info) and they’re now streamlining the check-in process to allow skiers and snowboarders to skip the ticket window and head straight to the lift.
Lastly, I don’t often bring up ESG (Environmental, Social and Governance) related policies but it is something that I pay attention to. Being an outdoor focused experience, MTN has always stated how important it is for them to take care of the environment and local natural resources. They recently announced a long-term agreement with Lincoln Clean Energy for the purchase of wind energy to reduce the emissions associated with Vail Resorts’ 2019 electricity use by 100 percent.
Management & Capital Allocation
Rob Katz took over as CEO in 2006. He has been the driver behind this major transformation and I have found just about every major decision he has made to be wise. He’s also heavily invested in the stock, something that is always a good sign for me as a long-term partner.
The company’s main focus is to continue investing in their resorts to maintain a high quality experience for the customer. I think this is very important since it’s the main differentiator between competitors. Fortunately, the company’s cash flow has grown nicely over the last 5 years as they’ve acquired other resorts to the point that they are generating a good amount of Free Cash Flow each year and have been able to return it via dividends.
MTN has increased the dividend dramatically over the last 6 years. The company has also grown considerably to where the profile of the investment has changed in my view from a pure growth investment to more of a hybrid growth and income. This makes it more appealing for my clients that are more retirement oriented and looking for cash flow related investments.
I expect the pace of dividend increases to slow moving forward (last year’s bump was almost 40%!), especially if we go through a recession, but I think Free Cash Flow will grow from about $425 million today to over $600 million over the next couple of years. That would put the stock based on today’s price at a forward 8% FCF yield (6.67% yield on EV) and give the company room to continue dividend increases moving forward. We purchased the stock at a 3.22% dividend yield. I couldn’t be happier to own a one-of-a-kind real estate asset at that yield as a starting point.
Skiing has been around for a long time and I don’t expect it to disappear anytime soon. While it’s a very discretionary activity, it’s also the type of activity that families tend to do year after year as a tradition. This makes for very loyal customers in an industry that really can’t be disrupted by technology, as so many others are right now. And in terms of utilizing technology and data, Vail has been the innovator and leader for the last 10 years. This is one of those types of investments that you could literally hold forever as long as management continues to run the company in a smart manner.
Thanks for following!
-Nick
Vail Resorts (MTN) – 5 year, weekly
*All slides from Vail Resorts 2018 Investor Presentation