COVID-19 caused travel and destination companies to lose ground, but this ski resort is holding up well. With more than one-half of its visitors local, it won’t be as severely affected as others. And now trading at early 2019 prices, shares are undervalued.
Vail Resorts, Inc. (MTN)
From Ian Wyatt’s Million Dollar Portfolio
There’s no denying that COVID-19 has devastated the U.S. travel industry. With a pandemic raging, folks just aren’t eager to get on a plane or take a vacation.
Airline passenger volumes have fallen by 85% so far this year, according to airline trade group Airlines for America. The number of available flights is down 72% systemwide.
It’s not just airlines that are suffering. The U.S. Travel Association estimates that leisure travel is down by more than 75%, eliminating 8 million jobs here in the U.S. and cutting as much as $1.2 trillion in lost economic output. To put that in perspective, the financial impact is nine times worse than 9/11.
Needless to say, travel industry stocks have been decimated since this global pandemic began.
Here’s what a lot of investors seem to lose sight of: This, too, shall pass. Just as the industry recovered after the devastating attacks on 9/11, this pandemic will end. Travelers will hit the open roads again. While it’s tough to predict when exactly that will happen, many travel-related companies have the financial resources to survive this slump and maybe even make some well-timed acquisitions.
One of those companies is Vail Resorts.
Vail operates 37 mountain resorts and regional ski areas around the world, allowing skiers to visit for the day or a week, or purchase annual season passes. Operating one of the largest networks of ski areas, Vail-owned resorts host millions of ski visitors every year.
At least that was true until this year.
The 2019-2020 ski season was understandably cut short when the resorts closed on March 15 in response to the pandemic. So, when Vail reported its fiscal third-quarter results last week, which covers what’s usually one of Vail’s busiest times of the year, the news was bad. It was not nearly as bad as a lot of folks thought it would be, though.
Vail’s revenue fell from $958 million in the year-earlier quarter to $694 million, which was no surprise. Actually, the drop wasn’t nearly as bad as the market expected. Net income totaled $152.5 million, less than half of the $292.1 million the company earned last year. Again, no huge surprise there. This quarter’s income works out to adjusted earnings per share of $4.29, well ahead of the consensus expectation of $2.96.
While Vail plans to be operational again for the North American summer season and the Australian ski season by the end of this month or early July, I suspect we’re still going to see a lingering drag on earnings. A big reason for that is Vail is taking care of its customers, offering credits to customers who bought its 2019-2020 Epic Pass. Those credits, ranging from 20% to 80% of the pass value depending on how many days were used, can be applied to Epic Pass purchases for the 2020-2021 season. The company is also offering free season pass insurance, which provides refunds in the event a resort closes or the passholder is injured, severely ill or losses their job.
There aren’t many companies that are that generous, and it will ultimately weigh on revenue and earnings. However, that generosity will win over a lot of customers and will likely win Vail more market share amongst winter sports enthusiasts.
When it comes to travel companies, Vail is uniquely able to survive this crisis.
The most obvious advantage is that skiing is an outdoor sport, allowing people to spread out. Sure, there are some chokepoints in the resort experience, such as lines for ski lifts and common areas such as restaurants, but social-distancing measures can be put in place to address those. Frankly, that’s why the fiscal third quarter wasn’t nearly as bad as it could have been.
The company is also cash-heavy, with more than $480 million on its balance sheet. That’s plenty of dry powder to see it through the next couple of quarters when business is certain to be slower than usual. It’s also plenty to work out deals to purchase additional properties that might not be weathering this business climate as well as Vail is.
I also believe Vail’s shares are attractive from a value perspective. Right now, it’s trading around $180, well down from its 52-week high of $255. Based on this latest earnings report, the current price implies the markets are expecting full-year earnings to be down by about a third compared to last year, which seems like a fair assumption to me. I actually don’t look for earnings to be down quite that much.
So, I’m taking advantage of the dip in Vail’s shares and will be adding it to the portfolio in the coming days.
Recommended Action: Buy Vail Resorts up to $200.
Ian Wyatt & Ben Shepherd, Ian Wyatt’s Million Dollar Portfolio, wyattresearch.com, June 11, 2020