Vail Resorts, Inc. (NYSE: MTN)
Total Page：16
File Type：pdf, Size：1020Kb
Krause Fund Research Fall 2017 Consumer Discretionary Vail Resorts, Inc. (NYSE: MTN) Recommendation: HOLD November 8, 2017 Analysts Benjamin Salvador [email protected] Current Price $234.89 Blake Seline Target Price $249-255 [email protected] Company Overview MTN Growth Becoming Capped Vail Resorts, Inc. (NYSE: MTN) is a premier mountain resort • Unfavorable Stock Price - There is limited upside potential company with properties in Australia, Canada and across the at the stock’s current price. Derived from the fundamental U.S. The business operates three segments: Mountain, PE formula, investors currently value Vail with a 4.2% CV Lodging and Real Estate. The Mountain segment generates EPS growth rate. A DCF and EP analysis yields share revenue by selling lift tickets and offering additional appreciation of 4% - 6%. amenities such as ski school, dining and retail. The • New Rival - In April 2017, KSL Capital and Aspen created company’s lodging segment includes owned or managed a newly formed entity. The partnership, as of November 8th, luxury hotels and condominiums, concessionaire properties, combines for fifteen resorts and will rival MTN’s season golf courses and transportation services. The Real Estate pass Epic for the 2018/2019 ski season.39 segment owns, develops and sells real estate around resorts. • Unsustainable, Speculative Growth – Vail has grown by acquisition. Forecasting future acquisitions is speculative. Over the past decade, the business has gained market share Therefore, skier visitation at Vail hits capacity by 2025. via acquisitions, growing its portfolio of resorts from five to Furthermore, Vail’s historical ticket price growth is fourteen. During FY 2017, MTN purchased the holy grail of unsustainable and decelerates by .3% per year during the ski resorts, Whistler Blackcomb, for an industry record $1.1 projection period. billion transaction. With a $700 million term loan added to • Premier Destinations - Despite emerging headwinds, Vail the balance sheet and a new competitor on the rise, Vail’s will continue to perform as an industry leader. The company historical growth will not be a representation of the future. owns four of the five most visited mountains in the U.S. and the single most visited mountain in North America. Stock Performance Highlights • Favorable Economic Outlook -Vail will benefit from a 52-week High $235.99 forecasted 2.8% rGDP growth the next three years driven 52-week Low $153.66 behind a dovish Fed, a CCI near a 17 year high, and Beta 0.864 continued low unemployment levels. Average Daily Volume 279,083 Share Highlights 1 Year Stock Price Performance Market Capitalization $9.53 b Shares Outstanding 40.4 m P/E (forward) 36.53x EPS (2018E) $6.43 Dividend Yield 1.71% Percent of Revenue by Segment Mountain 85% Lodging 14% Real Estate 1% Company Performance Highlights ROA 6.39% ROE 15.67% Revenues $1.91 b Financial Ratios Current Ratio 0.72 Debt to Equity 1.29 17 Source: Google Finance 1 Executive Summary it becomes more expensive to borrow money and economic growth becomes somewhat restricted. In November, President We recommend a HOLD rating for Vail Resorts, Inc. (NYSE: Trump elected a new Fed Chair, Jerome Powell, to a four-year MTN). Details related to our decision are discussed in depth term. It is important to note that as a member of the Fed Board of throughout the report. In summary, MTN begins to face its Governors, Powell supported current Chair Janet Yellen, who has first real competitor as a result of a newly formed entity only gradually increased rates after leaving them near zero for comprised of KSL and Aspen Ski Co. Future acquisition years after the 2007-2008 financial crisis. Considering President Trump ties himself to the success of the stock market and stated a opportunities are becoming limited with additional debt on 40 Vail’s balance sheet and a small ski industry which is low-interest rate policy, we believe interest rates will continue consolidating, all of which will impede the company from to be heightened only when the economy, and markets, can carrying historical growth rates into future periods. withstand it. Thus, rGDP will continue to flourish behind the same Considering future challenges and the company’s historical dovish sentiment stemming from the Fed. We forecast rates to increase once more in December of 2017 and three times in 2018 growth, we believe there is little upside potential in the 41 intrinsic valuation of the stock. and 2019 alongside continued economic expansion. Despite the company’s maturation, Vail owns four of the five GDP growth will continue to be driven by the optimism of most visited mountains in the U.S and acquired the single consumers. The Consumer Confidence Index is a leading most visited mountain in North America in 2016, Whistler economic indicator which represents individual sentiment Blackcomb in Canada. The company offers an industry- regarding the current economy and conditions six months into the leading pre-season pass called Epic, which brings in a future. When consumer confidence is high, consumers are more consistent revenue stream and cash flows year to year. inclined to spend money which spurs economic growth. The October reading came in at 125.9, its highest level since Operating behind a positive economic backdrop, the 42 company is still in position to meet analyst expectations and December 2000. We believe the Consumer Confidence Index perform well with its higher-end customer base. will go through its gradual ups and downs before hitting 128.5 by December 2018. Future optimism will be driven by a low The major risk to our thesis is that Vail continues to acquire unemployment rate and continued growth rhetoric stemming from ski resorts. Acquisitions will lead to more revenue, higher Washington. Whether it is tax cuts, deregulation, infrastructure analyst expectations and a higher stock price. spending or a new health care bill, consumers will anticipate what is to come, regardless of whether or not the bills are passed. We believe the current bull-run on the stock market partially reflects this type of rhetoric and is an indication of what is to come in Economic Analysis 2018. Thus, consumer confidence will lead to healthy consumer spending and strong GDP growth. Gross Domestic Product As a result, we forecast real GDP to grow at 2.8% the next three Real GDP is an inflation-adjusted measure that reflects the value years. This leaves Vail Resorts and the Consumer Discretionary of goods and services produced by an economy per year.32 70% sector well positioned for the near future. of GDP is comprised of personal consumption expenditures, of which 23.5% are recreational. Therefore, the indicator is a Unemployment fundamental representation of the overall health of the economy 3 and discretionary sector. Since 2010, GDP has grown at a much The unemployment rate has a large impact on the Consumer slower rate in comparison to historical economic expansions. Discretionary Sector. When unemployment rates are low, as they are now, more consumers have the wages to spend at discretionary businesses such as Vail. However, a tightened labor market naturally leads to an increase in wages as companies compete against each other for their job openings. The unemployment rate has declined for the past six years and currently sits at 4.1%.6 Source:Statista 8 However, the beginning second half of 2017 has shown stronger results. Second and third quarter GDP grew at a rate of 3.1% and 3.0%, respectively.8 We believe a favorable economic environment will continue behind a dovish Fed and high consumer confidence. The Fed’s major impact on the economy and GDP comes through Source: FRED6 raising and shedding interest rates. When interest rates increase, 2 Industry Analysis We forecast the unemployment rate to hit 3.9% by June 2018 and rise back up gradually to 4.6% by December 2019. Although some consider the U.S. economy to be at full-employment, we believe Overview low participation rates in conjunction with rising median wages will bring more workers back into the labor force. Both the labor Vail Resorts, Inc., falls into the Hotels, Restaurants and Leisure force participation rate and prime-aged participation rate tell the industry within the Consumer Discretionary sector. The industry same story – there is a large quantity of workers who are not comprises roughly 14.6% of the sector with 70% of the weight coming from the restaurant group and 25% from the hotel, resort currently at work, even despite a growing economy. 15 and cruise line group. The Hotels, Restaurants and Leisure industry is very concentrated with ten companies making up 83% of total market capitalization.15 Within the Hotels, Resorts and Leisure industry, Vail Resorts, Inc. is classified within the Ski and Snowboard Resort sub-industry.22 The ski industry is sensitive to macro-economic factors which impact consumer spending. Without an increasing amount of discretionary income behind a growing economy, resorts cannot mark up prices or increase profits by offering additional lodging or dining services. With that said, the ski industry is driven by snowfall. The Great Recession years around 2008 saw the largest amount of ski visits over the last decade, because of snowfall Source: FRED amounts. Participation has declined even after a recession and median wages on the rise since 2014.43 As a result, we have implemented heavier pricing pressure occurring on wages within Vail’s DCF model beginning in Fiscal 2018 through 2019 to account for an extremely tight labor market. Inversely, we have taken into consideration an increase in skier growth and effective ticket prices as a result of a strong economic indicator. Netted together, Vail is able to increase their prices higher than wage growth.