Grand Teton. Source: Vail Resorts.
A solid competitive advantage, or moat, is the best friend of the long-term investor. A moat allows for a business to achieve superior margins and returns over its competitors. An advantage like this over many years and decades is what allows for the share price of these businesses to increase tenfold, a hundredfold, or a thousandfold. In this article, I'll look at some types of moats and the businesses that are best associated with them and why Vail Resorts (MTN 3.68%) might have one of the strongest moats around -- one that's just getting stronger.
Four major moats
Pat Dorsey, in The Little Book That Builds Wealth, outlines the four major economic moats that a business can enjoy. They are intangible assets, switching costs, the network effect, and cost advantages. I'll argue that Vail Resorts benefits tremendously from two of these types of moats. Let's quickly address the other two before moving on.
Switching costs create an incentive for customers to stay with their current providers even if they might be able to get a better deal elsewhere. Most consumers stick with their banks, credit card providers, and cable and cellular providers even if they might be able to receive a better deal from competitors. Saving $5 a month on a cable bill might not be worth the hassle of calling two companies, returning the set-top box, and filling out new paperwork. That's why these types of businesses spend a great deal for customer acquisition. The relationship tends to become "sticky," and they will usually have a customer for many years.
The network effect creates an advantage for companies that are able to achieve scale and mindshare more quickly than others. A prime example is eBay. People looking to buy products tend to go to where there's the greatest set of offerings while sellers want to go where there's the greatest number of potential customers. Once it established itself, the online auction site became nearly impossible for another company to usurp, even if it had a better interface, customer service, or other benefit. The network effect creates a "virtuous cycle" that provides a powerful economic moat. Facebook and LinkedIn are two more recent examples of companies than benefit greatly from this phenomenon.
Great to have one -- better to have two
Source: Vail Resorts.
Many businesses would be thrilled to have one enduring competitive advantage; Vail Resorts possesses two. The company operates luxury ski resorts, predominantly in the western United States but also in Minnesota and Australia, and it has become an expert at navigating the regulatory requirements that go along with this business. Putting aside for a moment that there's a finite number of great mountains (more on this later), it would still be extremely difficult for a competitor to build a resort near one of Vail's. Intangible assets are its first economic moat.
These are large land developments that can require local, state, and sometimes federal approval. Vail is a major employer in Colorado and many of the other areas it operates in, and it fields a team of government-relations experts to help it navigate the waters of regulatory approval. To channel Warren Buffett for a moment, if you gave me $5 billion and told me to dethrone Vail Resorts, I would give you your money back and say it can't be done.
As good as the intangible assets are, Vail's cost advantages might be even more powerful. It possesses a cost advantage based on proximity. While it's possible to fly to Europe for a ski vacation, many of Vail's resorts are accessible for a day or weekend trip to Americans because of their proximity to much of the United States by car or plane. But the biggest cost advantage comes from, as Dorsey writes in his book, "access to a unique, world-class asset." He is writing about a special mine, but the thought process holds true for Vail's mountains.
You can't outsource, replicate, grow, or mimic the giant mountains around which these resorts are built. Park City, Breckenridge, Vail, and others became what they did largely because they are near fundamentally great mountains for skiing, snowboarding, and other winter sports. Vail continues to acquire prime properties, such as Park City Mountain Resort in 2014, which only further strengthens its hold on a finite number of great locations.
Moats stay and moats pay
Breckenridge. Source: Vail Resorts.
MTN is not a ticker you'll see prognosticated about on CNBC very often, but is has proved to be a compelling investment. It has more than tripled its EPS since 2011, and the stock price has trounced the S&P 500 index over the past five years.
On top of this, Vail has become a surprisingly solid dividend payer as well. After initiating a $0.15-per-share quarterly dividend in 2011, it has raised it to $0.623 per share currently. This level amounts to a yield, even after the recent great performance of the stock, of around 2%. With a market cap around $4.5 billion, this company still has a long growth runway ahead of it. Its strong moats should protect its cash flow, and I expect consistent dividend increases for years to come.
