COVID-19 has done some serious damage to the economy. But some sectors, such as dine-in restaurants, travel, and tourism, have been hit exceptionally hard. Many stocks in these sectors have plummeted. Investors could still benefit, however, as the havoc wreaked on many of these stocks presents some attractive buying opportunities -- especially now that the U.S. economy is in the early stages of reopening following lockdowns aimed to slow the spread of the coronavirus.
One compelling stock that is trading significantly below levels seen before the pandemic is Vail Resorts (MTN -4.59%), an operator of 37 destination mountain resorts and regional ski areas.
Image source: Getty Images.
Why Vail Resorts?
Vail didn't go unscathed following the lockdowns earlier this year. In the company's fiscal third quarter (the period that ended on April 30), revenue fell 27.5% year over year to $694 million. Earnings per share cratered, dropping from $7.12 in the year-ago period to $3.74.
The period was "significantly impacted by COVID-19 and the resulting closure of the Company's North American destination mountain resorts and regional ski areas on March 15, 2020," said the company's fiscal third-quarter earnings release.
But management responded to the challenges by taking swift steps including:
- Reducing its planned capital spending for 2020 by more than $80 million
- Suspending its dividend for at least two quarters (saving $142 million)
- Furloughing most year-round hourly employees and some salaried employees in the U.S.
- Reducing salaries of remaining salaried U.S. employees for six months
- Eliminating CEO and board cash compensation for six months
- Raising $600 million of unsecured senior notes at 6.250% that are due in May of 2025
All of these actions, combined with the company's cash on hand and its available revolving credit under agreements, should allow Vail to fund operations for two years' worth of extended resort shutdowns if necessary, management says. In other words, it's extremely unlikely that Vail won't be able to make it through this period and eventually recover from this pandemic.
A compelling valuation
Key to Vail stock's attractiveness today is the fact that shares may have been oversold relative to their long-term prospects. The stock is still down a whopping 25% from its February high. This price level arguably already reflects the increased debt load and the potential higher costs of operating ski resorts in a post-COVID-19 world, so it could provide a justifiable entry point.
Consider that if the company's operations reopen and Vail is able to resume its previous quarterly dividend, the stock would have a 3.8% dividend yield at this price. The share price also seems attractive relative to the business's potential: The stock currently trades at just 17 times its fiscal 2019 free cash flow -- a key profitability metric that was growing rapidly before the coronavirus struck. Vail's annual free cash flow has risen from $180 million in fiscal 2015 to $442 million in fiscal 2019.
Of course, Vail will have to weather the current challenging and evolving environment before it can return to growth. But opportunistic investors who buy now while there's still fear about the company's future may be rewarded over the long haul.
As the economy reopens, Vail stock could see outsize gains. Eventually, people will likely get back to normal vacation routines -- and outdoor activities like skiing could be among the first recreational options consumers perceive to be safe.
