Vail Resorts (NYSE:MTN) stock has crushed the broader market's return over the last 10 years -- it's up 558%. Millions of people visit the company's ski resorts every year, including Vail Mountain Resort in Colorado, Park City Resort in Utah, and Whistler Blackcomb in Canada.
The Colorado-headquartered company operates resorts across the U.S. and Canada, and it is looking to further expand internationally. (It already has a presence in Australia.) This is not a typical slow-growing hotel operator. Vail Resorts has a lot to offer investors looking for a growth stock.
How Vail Resorts makes money
Vail makes 85% of its money from its 14 ski resorts, where -- in addition to lift revenue -- the company generates revenue from operations such as ski schools, restaurants, retail, and non-ski mountain activities like snow tubing, hiking, and scenic tours. About 14% of revenue comes from the lodging segment, which includes its other luxury hotel properties and golf courses, among others. The remaining sliver derives from real estate transactions.
One of the metrics Vail management uses to evaluate its business performance is effective ticket price (ETP), which compares lift revenue to the total number of skier visits. Between fiscal 2014 and fiscal 2018, ETP increased 22.5% cumulatively, which shows how effective the company has been at squeezing more revenue out of each visitor.
The Rocky Mountains are about as good as it gets
Vail Resorts has tremendous pricing power. It owns some of the best ski resorts in the world, and there hasn't been a new ski resort built in North America in more than 35 years. The reason is that it's difficult to acquire the necessary government approval to build on public lands. During the 2017-2018 ski season, there were 72.5 million total ski visits in North America, and 16% of them went to Vail Resorts properties.
A majority of the people who travel to one of the company's resorts are out-of-state or international visitors. Vacationers made up 61% of skier visits during the 2016-2017 and 2017-2018 ski seasons. This percentage has been rising in recent years, a trend that could push ETP up further, as vacationers tend to spend more than locals. Out-of-state visitors favor the more expensive hotels and dine out more, whereas locals tend to stick to a budget.
What could cause Vail to stumble
Vail Resorts is a good business, but investors should be aware of the risks inherent in its industry -- the most obvious being that the weather might not favor it. Vail Resorts could struggle to grow revenue in years where the winters are warmer than usual. However, the company is not helpless in these situations. It owns water rights around its resorts for the sole purpose of manufacturing snow, enabling it to keep its slopes covered in snow for skiers.
Vail can also mitigate the impact of weather by inducing visitors to buy season passes, which is more of a commitment than simply buying a lift ticket. Management has made growing sales of season passes a priority, because it helps smooth out annual revenue streams. Season passes made up 47% of lift revenue in fiscal 2018, compared to just 35% in fiscal 2011.
A second risk is the economy. Like any travel-related business, Vail Resorts performs better when people have more disposable income to spend. The danger that revenue and earnings could dip during a recession applies to any business, but a downturn could prove a little more painful for Vail Resorts because of its fixed-cost operating structure.
Having fixed costs is great for margins when the economy is healthy and people are buying season passes. But in a scenario where people cut back sharply on travel and leisure spending, the company will still be on the hook for those costs, regardless of how many (or few) resort visitors there are to defray them. Thus, a decline in skier visits would not only cut into revenue, but it could put particularly intense pressure on margins and profitability.
However, if you are planning to buy and hold stocks for at least 10 years, these risks shouldn't be too much of a concern because Vail Resorts has plenty of opportunities to keep growing over the long term.
Acquisitions have been one of its key growth drivers in recent years, with purchases such as Whistler Blackcomb (2016) and Park City Mountain Resort (2014) contributing to the three-fold earnings-per-share growth it achieved between fiscal 2015 and fiscal 2018.
Two more acquisitions were announced this year. In July, the company revealed it was acquiring Peak Resorts (NASDAQ:SKIS) -- operator of 17 ski areas across the country. Additionally, it announced the purchase of the Falls Creek and Hotham Ski Resorts in Australia.
These deals, and those that will doubtless follow, are not solely intended to create a vast empire. A larger portfolio of properties allows Vail Resorts to sell season passes with access to multiple ski resorts across a geographic area -- something skiers naturally find appealing.
Vail Resorts is a buy
Based on its proven ability to raise lift prices and its ongoing strategy of acquiring more resorts around the world, this looks like a business worth owning for the long haul. However, the stock trades at a high valuation, as you can see in the table.
|Market capitalization||$9.65 billion|
|Revenue (TTM)||$2.24 billion|
|Net income (TTM)||$307 million|
|Free cash flow (TTM)||$455 million|
Vail has been able to grow revenue and profits at double-digit percentages over the past five years, so it's not surprising that the market has placed a premium on its shares. I imagine investors also like the effort management has made to smooth out revenue by pushing up the sales of season passes, which creates more clarity on revenues. Acquisitions of new resorts will only enhance this.
Also supporting the stock at these levels is the company's above-average dividend, which currently yields 2.74%. Vail Resorts typically pays out more than half of its annual earnings in dividends, while still investing for growth.
Investors may never get a chance to buy this stock cheap, given the company's growth opportunities and its competitive advantage as the operator of some of the planet's best ski destinations. If it were my money, I would start by picking up a small stake, then look to add more shares to it over time.