Vail Resorts (MTN 1.25%) is a profitable enterprise that owns valuable physical assets and a number of powerful brands. It produces excess cash that can be deployed in a number of ways -- reinvesting in the business, repurchasing shares, paying a dividend, or making acquisitions -- and choosing the proper blend has a huge impact on per-share returns. Three quotes from the second-quarter earnings call tell me that shareholders' capital is in good hands with Vail Resorts' management.
We did not complete any share repurchases in the past quarter, but intend to continue to take an opportunistic, yet methodical approach to future buybacks.
(All quotes courtesy of Seeking Alpha)
When a company repurchases its own shares it should be undergoing the same kind of analysis that any investor makes when he purchases a security. If you believe that the fair value for a share is $100 and it currently trades at $50, purchasing some would be a good idea. Likewise, a buy at $150 is not prudent.
Companies will often repurchase shares at a consistent level, i.e. $10 million every month, regardless of share price. If the stock price goes up over time this will benefit shareholders. Some companies seem to repurchase shares when they trade near all-time highs and are quiet when the share price is in the gutter. The best strategy is to aggressively buy when shares are undervalued and sit tight when they are fully valued or viewed dearly by the market.
There's no way to know, in the near-term, if shares are undervalued or overvalued. Company management, being privy to the most information and having control over the future direction of the business, should have the best idea. The fact that Vail's management is seeking out opportunistic buyback opportunities is a good thing. That they chose not to repurchase shares near all-time highs is better.
The plan includes approximately $60 million of maintenance capital expenditures and a number of high-impact, high ROI discretionary investments.
Every capital spending decision ought to be made by comparing it to the return, adjusted for risk, from deploying that capital in another way. Spending $1 million to build a new restaurant that will deliver a 10% annual return might be a bad use of capital if it means not buying back shares that are 50% undervalued. These high ROI discretionary investments should provide returns that would be difficult to achieve elsewhere. This is wonderful news for shareholders.
A new restaurant at Breckenridge, chairlift at Vail, and lodge remodel at Beaver Creek are the three high ROI discretionary investments planned in 2016. The area where the restaurant is being built at Breckenridge -- the most visited ski resort in the US -- lacks a major food and drink establishment. This is low hanging fruit for the firm. The Sun Up chairlift at Vail Mountain will increase capacity by 40% while also reducing travel time up the mountain. With this new lift Vail can serve more customers and provide a better experience. Less time waiting and more time skiing will lead to greater sales of individual lift tickets and season passes, while allowing Vail to charge higher prices for both. These high-impact investments will be money well spent.
So, I'd say, yes, we absolutely would look for acquisitions of size, but then we have to make sure that they are the right ones.
The bigger a company becomes, the larger an acquisition must be to "move the needle" in terms of revenue and earnings. Vail is mostly a US-based company, with 11 of its 12 locations stateside, but this is bound to change. After purchasing Perisher, Australia's largest ski resort, in 2015 the company is seeking further investments outside of the country. Its focus is on Europe and Japan, and large acquisitions in these areas would significantly transform the business.
The increased revenue and earnings would be great, but Vail would also benefit from geographic and currency diversification. Most importantly, international acquisitions would strengthen the value proposition of a "global" season pass. The ability to ski the best mountains in the US, Europe, Australia, Japan, and eventually Canada, South America and elsewhere with one season pass would make it difficult for smaller, local ski resorts to compete.
Vail's cash flow and scale allow it to deploy capital in a number of ways. Share repurchases, high ROI additions to existing mountains, and the ability to make big acquisitions leave this ski-resort operator in a class of its own. Throw in a 2.5% dividend yield, recently hiked by 30%, and this is a stock that should deliver superior returns over many years. Capital allocation is a critically important but often overlooked part of per-share returns. Vail's management has convinced me of their abilities in this department and I recommend seeing if your portfolio could benefit from picking up a few shares.