Experiencing the great outdoors is great for mental and physical health. And there are probably few better ways to do that than playing a sport or other recreational activity. A company that offers a very specific type of entertainment activity for outdoor enthusiasts is Vail Resorts (NYSE: MTN). This company today operates 37 mountain resorts and regional ski areas which it collectively refers to as resorts. As part of its business, it also offers other ancillary services such as a ski school, restaurants, retail and rental operations, etc. It also owns luxury hotels and other related properties. In recent months, the company’s shares have been under pressure. This comes even as the fundamental state of the business improves. Given the data we have today, stocks are starting to look very attractive. In fact, under the assumption that recent financial performance will continue, I’ve decided to rate the company as a moderate “buy” at the time of this writing.
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In November 2021, I wrote an article detailing the investment value of Vail Resorts. At that time, I called the company’s historical cash flow impressive. However, I have also highlighted the significant difficulties the company has experienced on the revenue side of the equation. Back then, the most recent financial performance was encouraging, but stocks looked anything but cheap. This led me to conclude that there were definitely better prospects in the market for investors to buy. And as a result, I ended up valuing the company as a “reserve”. This rating indicates my belief that the returns investors can earn from buying into the company in question should more or less match the broader market over a similar time frame. Since then, Vail Resorts has done a little worse than I expected. While the S&P 500 fell 11.1%, stocks in this outlook are down 24.1%.
Given this disparity in returns, you might think Vail Resorts’ fundamental performance has been abysmal. But the thing is, the data has been very promising lately. In the company’s first two quarters of fiscal 2022, for example, revenue was $1.08 billion. This represents a 32.5% increase from the $816.4 million generated by the company at the same time a year earlier. Year-over-year performance has been fairly consistent in each of the two quarters for which data is available. For example, in the second quarter of the year, revenues increased by 32.4% compared to the same period a year earlier. The company’s performance continued even after the end of the last quarter. In a press release on April 25, management said certain ski metrics for the current season have increased significantly year over year. In season to date (with date defined as ending April 17e this year), the total number of skier visits increased by 12.5% compared to the same period last year. Total lift ticket revenue increased 19.4%, while ski school revenue jumped 53%. Restaurant revenue is even more impressive, reaching 73.2% a year earlier, while North American resort and ski area store retail and rental revenue increased 39%.
On the company’s net income, the situation also continues to improve. Net profit of $84.1 million in the first half of 2022 eclipsed the $6 million loss made a year earlier. Cash flow from operations during this period was $611.3 million. This compares to sales of $459.1 million made in the same period of 2021. If we adjust for changes in working capital, cash flow would have fallen from $121.1 million last year to 255, $3 million this year. Meanwhile, the company’s EBITDA also increased, totaling $287.9 million in the first half of 2022. That compares to $178.8 million reported for the first six months of its 2021 fiscal year.
Management provided guidance for 2022. However, they said net income, amid expectations, should be around $345 million for the year. Using the midpoint, EBITDA should be around $823 million. To put it all into perspective, net income in 2021 was just $127.9 million, while EBITDA totaled $540.1 million. No indication was given regarding cash flow from operations. But if we assume it will grow at the same rate as forecast EBITDA, investors should expect a reading of around $800.4 million.
Using this data, pricing the company is not that difficult. Right now, using our estimates for 2022, the company is trading at a price/earnings multiple of 29.7. That’s down from the 40.7 I calculated in my last article. The price to operating cash flow ratio is considerably lower at 12.8. By comparison, in my last article, I expected it to be 20.9. Then we have the EV to EBITDA multiple. This should be, by my calculations, 14.3. This is down from 18.8 when I last wrote about the company. Already, the company’s shares look cheaper. But it would also be useful to assess the company in the context of how other leisure businesses trade. As part of this analysis, I decided to do just that with five selected companies. On a price/operating cash flow basis, these companies ranged from a low of 7.1 to a high of 27.2. Three of the five companies were less expensive than Vail Resorts. Using the EV to EBITDA approach instead, the range was 9.4 to 33.6. In this case, two of the five companies were cheaper than our target.
|Company||Price / Operating Cash||EV / EBITDA|
|Planet Fitness (PLNT)||27.2||33.6|
|SeaWorld Entertainment (SEAS)||7.7||10.3|
|Cedar Fair (FUN)||13.6||16.3|
|Six Flags Entertainment Group (SIX)||7.1||9.4|
Truth be told, I find myself baffled when it comes to trying to figure out why the broader market has pushed Vail Resorts shares so much. Due to the high price-to-earnings ratio, the company likely justified a decline, especially in the face of a falling market. But now it seems the pendulum has swung too far in the opposite direction. Although the company’s price/earnings multiple is still high, it is cheap on a cash flow basis. Although compared to its peers, the discount the company could bargain for is marginal at best. But on an absolute basis, it looks like the company might offer an added benefit. For this reason, I decided to change my “hold” rating to a “buy” rating.