The 2017-2018 ski season was marked by some of the lowest snow totals in years across the Rockies. Snowfall levels for several of Vail Resorts' (NYSE:MTN) biggest properties were down by 50% or more, including in areas like Vail, Beaver Creek, and Park City.
Yet the vacation resort operator's business results are looking as strong as ever thanks to an acquisition strategy that has allowed it to extend its geographic footprint far beyond the Rocky Mountains. Profitability is trending higher, too, with help from more effective marketing programs and strength in the high end of consumer ski vacation demand.
Investors have responded to all of that good news by sending Vail's shares up sharply in 2018. Below, we'll take a look at whether the stock still looks like a strong buy after that run-up.
Vail's impressive ski season numbers demonstrate how far the company has come in building its business into a global resort operation that can grow regardless of short-term snow conditions. Resort revenue rose 6% in the nine-month period that ended on April 30, despite challenging weather during the first half of the season. Operating income has expanded at an even faster pace, rising 8% to $522 million.
These results were powered by several big improvements that have made Vail's business more valuable over the past few years, including acquisitions like the Whistler Blackcomb property in Canada and a focus on selling season passes earlier in the year.
Meanwhile, by delivering a consistently positive vacation experience, the company is finding it easier to fill its ski lifts when the weather conditions are right. "Our performance [in the 2017-2018 season] demonstrates the resiliency of our business model, the stability provided by our geographically diverse resort network, and the importance of increased advanced purchase products, including our season passes," said CEO Rob Katz in early June.
Risks to watch
Vail's business is no longer as sensitive to weather shifts in any one geographic area, but other key risks remain for shareholders. Some of these have actually increased in recent years.
Earnings growth is dependent on strength in the leisure and business travel segments that are usually among the hardest hit during a cyclical downturn, for example. At the same time, Vail's large footprint means that it is exposed to potentially sharp declines in profitability if revenue falls, given the high fixed costs involved in operating a network of mountain resorts.
Finally, the company's acquisition spree has added to two financial risks. First, long-term debt has roughly doubled since 2014 to $1.2 billion. And second, Vail's annual capex has passed $100 million as management directs resources toward enhancing the value of purchased properties through upgrades like new ski lifts.
Outlook and valuation
With adjusted net income expected to be in a range of $360 million to $381 million for fiscal 2018, the company can easily afford to continue making aggressive investments into its properties. And those upgrades are already paying dividends, as illustrated by a 12% jump in early sales of season passes for the 2018-2019 ski season (as of May 29). Impressively, that growth rises to 19% on a dollar basis (i.e. factoring in Vail's higher ticket prices).
The biggest danger in buying a high-performing operation such as Vail is paying too high a price. With shares valued at 33 times expected fiscal 2018 earnings -- compared to 18 times earnings for the broader market -- that's clearly a risk right now. But investors might still consider owning a piece of this attractive business, given its strong fundamentals and the rising likelihood that the resort giant will generate robust long-term profits, regardless of the weather conditions in any given year.