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In a release issued on January 15, 2013, Vail Resorts (NYSE:MTN) scaled down its full-year guidance due to poor weather conditions at its Colorado Resorts. It now estimates net income to be in a range of $39 million to $49 million in fiscal 2013, which will be more than double last year's $16 million. At the current price of $52 the stock boasts a trailing 12 month PE of 195 and with its current downgrade it may be time to take a complete relook at the company and its fundamentals.

Through its portfolio of seven resorts and a collection of luxury hotels and restaurants Vail resorts seeks to provide a comprehensive vacation experience to a traveler. It generates 75% of its revenue from the Mountain segment, 21% from the lodging and dining services and the rest from developing real estate around the resorts. In short, the entire business model is centered on people visiting its resorts for a great vacation experience and Vail has done a great job at backward integration in the business. As soon as visitors get off airplanes, the company offers them pick up services through its transport company. They are then taken to the company owned resorts, which are close to the company owned mountains where visitors can have a great skiing experience. That's not all, the company owns ski schools and rents out ski equipment to visitors, provides a range of dining options and runs several other shops in the vicinity so that visitors can indulge in shopping as well.

Mountain Segment

Industry Positioning and Market Share

Vail resorts has a very appealing portfolio of resorts. The Breckenridge Ski Resort, Vail Mountain Ski Resort, Keystone Resort, and Beaver Creek Resort were the first, second, third and fourth most visited ski resorts in 2011/12. In the same period 6.1 million people visited the ski resorts operated by the company, which represents a 12% market share of the United States ski market.

Below are some of the important parameters of the ski areas operated by the company:

Ranking (number of visits)

Resort

Skiable Area (acres)

Summit elevation (feet)

Total Lifts

Uphill Capacity/Hour (NYSE:PPL)

1

Breckenridge Resort

2,358

12,998

29

40,680

2

Vail Mountain

5,289

11,570

32

57,802

3

Keystone Resort

3,148

12,408

20

33,564

4

Beaver Creek Resort

1,805

11,440

17

32,500

10

Heavenly Mountain

4,800

10,067

29

52,000

16

Northstar Resort

3,000

8,610

20

37,891

In the Mountain segment the company generates maximum revenue through the sale of lift tickets, which is around 33% of total revenue for the company. It operates ski schools and dining and restaurant facilities around its resorts and rents out retail space to other operators in order to bring diversity to the offerings.

Below is a detailed categorization of revenue from the Mountain segment:

Mountain Segment

FY 2012 (million)

% of total revenue

Lift tickets

342.5

33.43

Retail/Rental

181.77

17.74

Other

89.67

8.75

Ski School

84.29

8.23

Dining

68.38

6.67

The guests who visit the resorts are divided into two categories: (NYSE:I) in-state or local visitors (ii) out of state visitors (destination visitors). Destination visitors also include international travelers and tend to avail of services at the higher end of the price range along with utilizing a host of other ancillary facilities. In 2011/12, 57% of the total visitors were destination guests and 43% were in-state guests.

Lodging Segment

The company owns and manages a collection of luxury and upper scale hotels in and around its resorts including the RockResorts brand. It also owns five golf courses, a transportation company and two national park service properties. Collectively the company owns or manages 4900 hotel and condominium rooms in addition to spa's and fitness centers.

Lodging Segment

FY 2012

(million)

% of total revenue

Owned Hotel Rooms

45.13

4.41

Managed Condominium Rooms

40.47

3.95

Other

38.38

3.75

Dining

29.98

2.93

Transportation

18.86

1.84

Golf

15.16

1.48

Strategic Acquisitions

The company acquired Kirkwood Mountain resorts located in the Lake Tahoe region in California, for $18 million in April 2012. Kirkwood is a year round resort which will help diversify the company's operations from the Colorado area and strengthen its presence in the Lake Tahoe region. Earlier the company had acquired another year round resort, Northstar, in the Tahoe region for $63 million. Both these acquisition will stabilize revenue for the company and help smooth the business cycle.

Vail Resorts acquired Skiinfo AS, a Norwegian company that owns and operates several European websites that focus on skiing and vacation travel. The majority of people plan their vacations using some form of online help and this acquisition will help the company market its own resorts to European travelers. As we noted above, international travelers tend to utilize a range of ancillary services at a higher price point, which will help the company boost its margins in the future.

Net Profit Margins

The net profit margin for the company has ranged from 1.5% to 9% and is seen to be directly related to the amount of snowfall in each year. 2011/12 saw one of the warmest winters in recent times and the profit margins plummeted to 1.5% whereas 2008/09 saw above-average snowfall and the profit margins were as high as 9%. Margins will likely stabilize as the company adds more resorts and offerings in the year round vacation space.

Historical PE

As I mentioned above the current PE for the stock is 195, but we first need to put this number into context. The markets grant a high PE to certain businesses and a low PE to certain other businesses. Hence it makes sense to first have a look at the historical PE of the stock.

I compiled the PE ratio of the stock with the price on the last day of the financial year (which ends on July 31) and the earnings of the company in that period. Below is the table:

Date

Price

EPS_XO

PE Ratio

7/31/2012

49.64

0.45

110.3111

7/29/2011

45.75

0.94

48.67021

7/30/2010

37.38

0.83

45.03614

7/31/2009

28.61

1.33

21.51128

7/31/2008

40.38

2.64

15.29545

7/31/2007

53.55

1.56

34.32692

7/31/2006

34.57

1.19

29.05042

7/29/2005

28.41

0.64

44.39063

EPS_XO - Earnings Per Share before exceptional items.

We see that the stock has had a PE between 25 and 50 in the past. At its current price the PE turns out to be 195, which is way above the historical range.

Let us look at this same thing from a different perspective. In its latest revision management has guided that net income for fiscal year 2012/13 will be in the range of $39 to $49 million. The company has 35.5821 million shares outstanding so the EPS for the company at the upper end and lower end will be as follows:

Lower End ($39 million)

Upper End ($49 million)

Diluted EPS

1.096

1.377

Let us try to reverse engineer the price for the stock at the historical PE ratios:

PE

EPS

25

50

1.096

Scenario 1

27.4

Scenario 3

54.8

1.377

Scenario 2

34.42

Scenario 4

68.85

Let me verbally explain the table above. We are trying to estimate the target price of the stock on July 31, 2013 in four different scenarios.

Scenario 1 - If the EPS for the company is 1.096 and the market awards it a PE ratio at the lower end of the price range. In this case the price of the stock should be around $27.

Scenario 2 - Assuming that the EPS for the company is 1.377 and the market awards it a PE ratio of 25. In this case the price turns out to be around $35.

Scenario 3 - If the EPS for the company is at the lower end of its estimates but the market awards it a PE ratio at the higher end then the estimated stock price turns out to be around $55.

Scenario 4 - If the EPS for the company is at the higher end of its estimates and the market also awards it a PE ratio at the higher end then the estimated price for the stock will be around $69.

Investors who understand market behavior know very well that ratios like the PE ratio tend to be less volatile than other parameters like the price. So if the current PE ratio is above its historical range then it is very likely that the PE ratio will continue to trend above the historical range. Hence the most likely scenario for the stock price is to be at least around $69 by July 31, 2013.

Source: Vail Resorts: Way To Go Despite Profit Warning