Bank of America Turns Bullish on Vail Resorts
Analysts at Bank of America Merrill Lynch upgraded shares of Vail Resorts (NYSE: MTN) on Friday to Buy, citing potential for multiple expansion in the name. On Friday, MTN shares have surged 4.55% to over $50.00 on the session. The analysts wrote that "We believe MTN shares are undervalued after its business model has been tested through 1) the financial crisis and 2) a very weak snow year in FY12. Increasing season pass sales/prices and new announcements on summer initiatives are both emerging upside catalysts that combined with lower earnings volatility going forward, should start to drive multiple expansion." The firm has a $57.00 price objective on the stock.
Vail Resorts is a preeminent winter recreation company which operates ski resorts in Colorado and in Lake Tahoe. The company owns and operates Vail, Beaver Creek, Breckenridge, Keystone, Heavenly, Northstar-at-Tahoe, and Kirkwood. The company is leveraged to affluent consumers and has achieved brand recognition within the winter destination space through its season pass program, which covers all of its resorts.
Bank of America notes that the average season pass holder skis around 10 times per year and that the pass pays for itself after around 6 visits. As such, the season pass program represents significant value to many consumers while also providing consumers with a wide variety of resorts. According to the analysts' report, Vail Resort's 2012/2013 spring selling season for ski passes is off to a good start, with units/$ up 17%/22%. Furthermore, pricing is up 5%. Bank of America said it thinks that Vail Resorts will continue to increase its pricing power given the strong value that consumers receive from the season pass.
The strong metrics at the company come despite a terrible snow fall year in 2011/2012. Snowfall was down over 50% at MTN's resorts this season, which contributed to a 12.1% decline in skier visits. Nevertheless, revenues for the season were up 1.4%, which Bank of America attributes to the company's "season pass program and the spending pattern of the luxury consumer. Overall, the company's performance was strong given the lack of cooperation from the weather. The stock could be setting up for a big move if the upcoming season turns out to be more in-line with historical norms.
The company is also trying to grow through instituting more on-mountain summer initiatives. The analysts wrote that "we believe upside can be generated as MTN begins to quantify the earnings potential of future summer offerings." A law which was passed in November 2011 allows for "natural resource based" year round activities on Forest Service Land (where some of MTN's resorts are). The specific allowable activities includes zip lines, mountain biking, and mountain bike parks and rope courses. These could be future incremental revenue drivers for Vail Resorts.
The chart of the stock also looks interesting, as MTN shares began jumping at the conclusion of the sub-par snow ski season. In fact, the stock, which has been range-bound over the last year has recently broken out to new 52-week highs. From a technical perspective this is a strong stock, and a return to historical snow-fall levels in Colorado and at the Lake Tahoe resorts could provide a catalyst into the New Year. Shares were trading Friday around 15% above their 50-day moving average and 18% above their 200-day moving average.
While Vail Resorts may possess an emerging brand and value profile, MTN is hardly a risk-free stock. The company is leveraged to volatile cyclical forces which could knock it off course. Many of the visitors to its resorts come from around the world, and a slowing global economy, or even a recession, would likely trigger revenue declines. In the same way, a shock to the domestic economy would likely set off a deeper cycle of consumer retrenchment which might severely impair winter-destination travel. Cyclical factors in major markets across the United States could hinder domestic travel to the company's properties.
Another factor that investors might want to consider with Vail Resorts is its reliance on the weather – a difficult variable to predict. If the upcoming ski season is a repeat of last year, this stock may decline. However, snow totals at many of the company's resorts were near record levels in the prior year. Similarly, strong snow totals in the upcoming season could provide a catalyst for the stock.
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