As an avid outdoorsman, Vail Resorts (MTN) is one of my favorite stocks to own. As I said in the original piece I published last December describing my initial purchase of MTN, one of the best vacations I’ve ever had in my life was to Stowe Mountain Resort in Vermont, and I’d been waiting for a bit of weakness in MTN shares ever since Vail acquired that lovely locale to give myself a bit of nostalgic exposure. Granted, MTN has a lot more going for it than Stowe (as much as I enjoyed my week there, I wouldn’t put invested capital at risk just because of fond memories) and I was pleased with the company’s recent earnings release. I wanted to do a quick update for follower since this stock doesn’t receive a lot of exposure. I especially wanted to highlight my favorite part about the press release: the 40% dividend increase than MTN management just gave to shareholders.
When I was just starting out managing my own portfolio, I devoured investing related literature. I flocked to the classics: Benjamin Graham, one of his protégé’s, Warren Buffett, Lowell Miller, Jim Cramer (I know many people are put off by his showmanship, but I saw him in Iron Man and began watching his show thereafter. Honestly, I enjoy it; I don’t follow his bullish or bearish notions blindly but I genuinely think that Mr. Cramer wants to help the Main Street investor reach their financial goals), and Peter Lynch, just to name a few. One of my favorite snippets from the pages I consumed was Mr. Lynch’s bit about buying what you know and understand. This helps investors to maintain a rational, long-term mindset in the face of market volatility (most people are much less likely to become emotional and make fear driven decisions when they feel a sense of ownership/partnership with products and services that they know and love).
After I watched my top ranked Virginia Cavaliers beat up on the Louisville Cardinals in the ACC basketball tournament the other day, I spent much of my afternoon researching a couple of beaten down MLP’s. Their historically high yields caught my eye. I’m always a sucker for value. However, even though I think these midstream operations might present interesting opportunities in the market, I was never compelled to invest. Why? Because the oil & gas business just doesn’t jive with my personal viewpoints regarding environmental stewardship and sustainable living.
Frankly put, I’m not totally sure where morals should fall when investing. I don’t think there is necessarily a concrete rule that portfolio managers should follow. I’ve heard good arguments for casting personal beliefs aside in pursuit of profits so that you can do good in the world by doing well in the market (I read a comment one time from a woman who generates massive cash flows from tobacco companies which help him make hefty cancer related charitable donations).
Warren Buffett has talked about pushing back the vast majority of his charitable donations until his death because he believes that he’s one of the better compounders of wealth that there is out there and it’s likely that the longer he’s managing the money, the more he’ll have to donate when it’s all said and done. Who am I to argue with the Oracle, who by most accounts, seems to be a stand up guy. I don’t know where exactly to draw the line personally, but in life I’m typically pretty disciplined with regard to standing up what I believe in and not violating the principles that I think I ought to live by, which is why I divested my energy holdings years ago and haven’t gotten back into that space directly since.
Now, this piece wasn’t meant to be an essay on the morality of equity ownership. I just got a little side tracked and wanted to take the time to explain myself. However, there was a reason that I went down this path in the first place. While I didn’t feel the compelled to invest in the potentially undervalued MLP names, I was pleased to see MTN’s results, which moved this company up higher on my shopping list at the moment, in part, because I do feel a connection with the outdoor experiences that Vail Resorts offer. There’s nothing better in the market than finding a high quality company with strong business operations that mesh really well with your personal passions in life.
In my original piece regarding Vail, I broke down their property portfolio. Not much has changed in that regard, in this piece I will be focusing on the operations during the most recent quarter and the sustainability of the company’s dividend now that is it 40% higher than it was a few months ago when I initiated my exposure (for those of you who aren't familiar with MTN, here's a quick image from their 2017 annual report breaking down the properties they own).
Without a doubt, this was a tough quarter for MTN in terms of the weather. CEO Rob Katz highlighted the fact that through the end of January, the snowfall at Vail, Beaver Creek, and Park City was at 30 year lows and Tahoe was significantly below its historical average as well. Despite weather related challenges that were out of management’s control, I thought they executed quite well.
Total lift revenue increased 6.6% although volumes were down 3.1%. It appears that MTN maintains pricing power as it was able to successfully increase the price of its season pass (this is what happens when your portfolio is so strong). Visitation at newly acquired Whistler Blackcomb was at record levels (Stowe, which was also a newly acquired property performed in-line with expectations although temperatures were exceedingly cold during the holiday season when management predicted the highest volumes.
The fact that Vail was about to grow revenues by 2% and EBITDA by 1.2% in subpar snow conditions was all I needed to hear regarding this management team and its ability to negotiate tough business climates.
Making matters even better, MTN CFO Michael Barkin mentioned that he expects the company to save ~$40m in 2018 due to tax related benefits from the recent reform. Barkin highlighted the strength of the balance sheet, which includes $235.5m of cash on hand and a 1.7x debt ratio regarding ttm reported EBITDA. Katz announced that the company will continue to use its cash to make investments in its resorts and chair lifts/gondolas. It seems clear to me that the company isn’t sitting on its heels during a time of strength and is doing a lot to enhance user experience at its resorts. I believe MTN already has a fairly wide moat in the winter sports resort arena and these investments only strengthens the pull that the company’s Epic Pass has on skiers and snowboarders worldwide.
Not only is management using cash flows and tax savings to re-invest in the business, but it is also increasing the minimum wage that its works will receive during the upcoming snow season, highlighted by an 11.36% in Utah, Colorado, and California, and a 14.53% at Whistler. I’m sure that workers will appreciate their wage increases and I don’t doubt that investing in its team like this will further enhance the customer experience at these results. And finally, MTN management didn’t forget about its shareholders; the company also announced the aforementioned 40% dividend increase, from
There’s the old saying that the safest dividend is the most recently increased dividend. Theoretically, this makes a lot of sense. No responsible management team should ever increase their dividend above a sustainable level. With that being said, not all management teams are as responsible as they should be. I try hard to partner with only the highest quality c-suites when I’m making equity purchases, but I also tend to double check their work when it comes to dividend raises since collecting reliably increasing dividends is the foundation of my portfolio management strategy.
So, let’s take a look at MTN’s new dividend from a sustainability standpoint. MTN currently has ~40.5m shares outstanding. Multiplying this figure by the $5.88 annual dividend and you come to a ~$237m figure due to shareholders over the next 4 quarters. Right now, management’s FY18 EBITDA guidance is $599m-$625m and expected FY18 net income is $379m-$409m. Right now, the average analyst estimate for 2018 EPS is $8.60/share (it’s also important to note that this figure is bolstered greatly by tax benefits and the 2019 analyst estimate is lower, at $7.58). Either way, the $5.88 dividend is covered. It appears that MTN will have to slow its dividend growth down significantly (most likely in-line with EPS growth) moving forward, but I knew that, having mentioned it in my previous MTN article, when I bought shares in the first place.
Looking ahead, MTN remains a highly cyclical stock. Vail relies on discretionary spending which will likely slow down if the economy takes a turn for the worst. It also relies on favorable weather patterns. 2017 was a terrible winter for much of the American West and while it’s certainly possible that snow fall is low again. Global warming remains a long-term headwind for MTN, though I don’t think we’re anywhere near a climate where we shouldn’t expect to see snow at high altitudes (what’s more, if/when we ever get to that point in time, equity ownership in any company might not matter because the world will have much bigger fish to fry). I wouldn’t be surprised to see snowfall totals reverting to the historical mean in the coming seasons, which would bode really well for MTN with pent up demand from winter sports fanatics after the most recent subpar season.
This isn’t a company that I would feel comfortable going overweight with, but I am happy to have the exposure that I have and after this recent 40% dividend increase that exceeded the upper end of my expectations, I am hoping to fill out my position on the next bought of weakness. My cost basis is currently $221.89 and I would love to average down my position with a purchase in the $200 area. The stock was trading down near $200 in February during all of the negative volatility but at the time I was more focused on adding higher quality dividend growth names names. However, an extra 40% on the dividend changes the equation for me and should MTN experience another sell-off, I’ll likely be adding to my position in that area, which would represent a ~2.95% dividend yield.
disclosure: I am long MTN.