Vail Resorts (MTN) operates a range of resorts and lodges in North America. The company has three segments, Mountain, Lodging, and Real Estate, with its business model heavily geared towards skiing activities.
The company predominantly acts as an acquisition vehicle these days, thus causing frequent abrupt stock price movements after announcements. Vail has just announced another acquisition, which I’m bearish about; here’s why.
Expanding Into Europe Adds Little Economic Value
The world’s largest ski resort operator announced earlier this month that it’s investing in Europe for the first time by acquiring a 55% stake in Andermatt-Sedrun Sport for approximately CHF$149M.
When asked about the deal, Vail CEO Kirstel A.Lynch responded: “Entering the European ski market has been a long-term strategic priority for Vail Resorts. We are excited to be partnering with ASA and investing our capital and resources to support Andermatt-Sedrun’s transformation into a premier destination resort,” she also added: “We plan to rely heavily on and learn from our partners, community members and the Andermatt-Sedrun team as we gain experience and understanding of the resort, its guests, and operations. We are proud to add this incredible Swiss destination to our network of world-class resorts and to the Epic Pass as we expand access for our existing pass holders and look to create an even stronger offering for skiers and riders in Europe.”
The financial results of the deal will most likely be reported as a business combination under the U.S. GAAP accounting laws.
Vail Resorts will take control of the entity with the assets of Andermatt-Sedrun Sport reported at fair value. The parent will report 55% of the subsidiaries’ assets, liabilities, income, and expenses on its core financial statements, with a non-controlling interest account created for the excess 45% that Vail doesn’t own.
This acquisition brings with it hedging abilities, in which Vail could establish a footprint in a developed economic block and subsequently smooth out its earnings volatility.
However, there’s no doubting the fact that Vail will need to expand further if it’s in search of key synergies, which could add efficiency to its business model.
Earning and Key Value Drivers
Vail Resorts’s second-quarter earnings came in light as it missed estimates by 19 cents per share, and missed its revenue target by $50.26 million.
The more concerning matter is that Vail has failed to capitalize on lighter COVID-19 restrictions. The firm’s gross and operating margins have weakened by 10.44% and 17.35%, respectively, in the past year, suggesting that operational efficiency is something that’s been found wanting.
Furthermore, Vail’s cash flows relative to its CapEx are disappointing. Objectively speaking, Vail’s cash flows ought to have been more robust amid reopenings, and a -33.93% drag on cash flows relative to CapEx should be unacceptable to investors.
It’s challenging to align Vail Resorts’ prospects with the macroeconomic environment. If anything, the stock will probably be overly sensitive to any downturns in consumer spending.
It’s probable that we’ll see a pullback in leisure spending in North America and Europe due to rising household obligations and rising interest rates. Thus, discretionary activities could head on a downward spiral.
The final matter worth mentioning is that Vail relies on skiing customers, which holds seasonality. The summer is upon most of its facilities, meaning that its earnings are likely to dry up for the foreseeable future, and we may well see investors divest from the stock as a consequence.
Valuation & Dividend Analysis
It’s worrisome to see that the stock is trading at 50.6x its earnings, a 25.1x sector relative premium. This data point perhaps outlines the challenges the company faces on an operational scale, signaling that the stock is poor value for money at the moment.
Vail’s price-to-sales and price-to-cash flow of 5x and 16.1x consolidate the claim that this is an overvalued stock. The mentioned metrics aren’t overly inflated, but the concern is that they’re trading at sector premiums of 3.85x and 0.42x, respectively.
Seeing as Vail provides a dividend yield of 1.4%, many investors may be less concerned about the stock’s capital gains profile, and more concerned with its dividend prospects.
However, if looked at isolation, it’s clear that Vail may struggle to cover its dividends in the longer term. With a dividend coverage ratio of only 1.6x combined with a below-average interest coverage ratio of 2.7x, it’s safe to say that the company’s dividend profile is questionable.
Wall Street’s Take
Turning to Wall Street, Vail stock earns a Moderate Buy consensus rating based on two Buys and four Holds assigned in the past three months. The average Vail Resorts price target of $307.50 implies 16.7% upside potential.
Bottom Line
Investors shouldn’t jump onto the re-opening play bandwagon, especially when it comes to Vail Resorts. The stock has experienced a temporary lift after announcing that it would acquire Andermatt-Sedrun Sport.
However, there’s no linear way of arguing that Vail Resorts is a good investment right now.
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