Thursday, September 24, 2009

Vail Resorts (NYSE: MTN): Is It All Downhill from Here?

I have been semi-following (and investing accordingly) Vail Resorts (NYSE: MTN) for about a year now. They just reported their full-year (FY09) results, and have guidance for the next year. The opened at $36ish and climbed up very quickly to near $39 before the market turned south, along with them. They are now up only a percent or so.

MTN has three lines of operations: mountain, real estate and lodging. The bulk of their business is the mountain/lodging segment: they run several high-end ski places, including the eponymous Colorado resort. I should also say that they are a well-run business, did not go crazy with leverage or real estate (unlike their competitor Intrawest), and have what I consider a decent moat. Most of their operations are on federal land and subject to numerous restrictions, which makes it harder for new entrants to compete. They have expanded into some summer businesses. In addition, they foresaw the slump and planned accordingly last fall. The company also does an excellent job in breaking out revenues and expenses by segment, as well as giving a lot of relevant metrics (# of visits; effective ticket prices; revenue per available room). They even report EBITDA by segment and give great updates on advance pass sales and the real estate pipeline, which is very helpful for an analyst. They have also been paying down debt diligently, which, in their case, is good news for the shareholders.

Now on to the bad part.

MTN operates a highly cyclical business: they are in high-end tourism. Ski vacations are pricey for Joe Sixpack even in the best of times. Last October I priced Christmas week in Vail (airline tix, rental car, hotel, ski rental, lift tix) vs. the same week on a mid-range, all-inclusive cruise out of Miami (again, with airline tix), and the ski vacation was 2x the price of the mid-range cruise. I know that they are not directly comparable but I think it provides a good guidepost.

On top, while Vail Resorts markets itself as a resort operator and all that, in fact, if you dig in the 10-K's you will find that MTN is primarily a LIFT operator. This is correct, the lift ticket business is the single most important business they have. It is a nice local monopoly in the whole area so long as there are people who want to ski. And the problem with the lift business is that you have to run the lifts whether you've got people or not. This is a huge fixed cost. To their credit, they have done their best to drive traffic by offering great deals on seasonal passes to ensure a level of revenues, and they have managed capex accordingly.

Let's look at valuation. Cyclical businesses generally have, you guessed it, cyclical earnings. This, in some cases, leads to cyclical multiples and, thus, cyclical valuations. One can make a killing both on the way up and the way down, with some timing luck. Look at the fertilizer companies as a good example.

MTN reported today for the FY and gave guidance for next year. Let's take a look:
FY 2006 NI: $46 mm
FY 2007 NI: $61 mm
FY 2008 NI: $103 mm
FY 2009 NI: $49 mm
FY 2010 guidance NI: $25-$35 mm

Market cap is about $1.30 bn (ignoring options, this is just a back-of-the-envelope calc). This implies FORWARD p/e of 37x-52x. Even Obama and Krugman admit that unemployment will linger for a while, and MTN thrives in a high consumer spend environment. They are 13x their very best year which may not come around for a while (nice boost from the 3rd home market and sub-5% unemployment).

The P/E numbers do not work out for me on the back of the envelope which means they probably won't work out in excel either.

Like they say, buyer beware.

Update 1 9/24/09: And from tomorrow's WSJ, comes this relevant piece: Marriott is halting all timeshare and luxe-res developments and taking a $760 mm writedown on what it has in progress. This is the real estate part of the business at MTN that I mentioned above. You can read in the 10-K about their projects, incl. a Ritz-branded residence project with part fractional ownership. "The pullback affects all three formats that Marriott sells under its Marriott and Ritz-Carlton brands: time-shares, fractional-ownership projects and luxury-residential projects. Marriott is permanently exiting development of luxury-residential projects, which are for-sale condominiums and penthouses that sit atop or adjacent to its hotels." Poof.

A quick check of Marriott's last Q shows that they have $2,001 mm of timeshare "inventory", Item 9. This is a near 40% write-off, if it came only from there.
MTN has $311 mm of "real estate held for sale or development" and is substantially less diversified and less widely marketed than Marriott's efforts. I do not remember them taking any charges on those assets. You do the math.

Update 2 9/26/2009: An Aspen hotel developer files for BK. Note the super-tricky land use situation: something I mention above as a barrier to entry.

Update 3 10/07/2009: B of A upgrades MTN, price target of $37. Stock is up to $34. Clearly, not my view.

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