Vail Resorts: A Mountain Sized Moat
Vail Resorts (MTN) has built a highly defensible business predicated on two key tenets: own assets that are difficult, if not impossible, to replicate; and offer its target consumer a compelling value. Following this path has led to a self-reinforcing cycle of market share consolidation, growing cash flows, and reinvestment into an expanded network of assets. Vail’s deep and widening moat enables strong returns and, with current representation mostly in North America, global opportunities for growth.
Vail is a ski resort owner and operator. It has amassed a collection of marquee resorts across North America and Australia. A new ski resort has not been built domestically in over 35 years due to significant hurdles that exist, including limited supply of accessible land appropriate for skiing, government permitting and oversight, and the large capital investment required to compete with the well-established resorts. Therefore, while not impossible for another domestic resort to be constructed, it is highly unlikely. The lack of new resorts enhances the value of the established ones, and Vail has accumulated some of the best. It currently owns seven of the top 15 most visited resorts in the United States, including the top four: Breckenridge (1), Vail Mountain (2), Park City (3), Keystone (4), Beaver Creek (7), Northstar (11), and Heavenly (13). The company also recently closed on the purchase of Whistler Blackcomb, the largest and most visited ski resort in North America. The Whistler acquisition adds another marquee asset to their international portfolio which also includes Perisher, the most visited resort in Australia.
While owning great assets is a good start, Vail has also excelled at compelling consumers to visit their mountains. The company envisioned a new way to run a ski resort, which was not only better for the customer but also for the operator. Historically, ski resorts have been run as individual profit centers, relying on their most loyal guests to support operations by purchasing expensive season passes and charging attractive daily rates to drive additional volumes throughout the season. Vail hypothesized a business where the collection of resorts was the strength, and by offering all of their properties in a single season pass – the Epic Pass – at a price far below their competitors, it would drive increased volumes and market share. By purchasing Vail’s Epic Pass, the consumer receives a better product with improved optionality at a lower price, and benefits with each additional resort added to the program. Loyal patrons who purchase season passes receive a better value by committing early, while those who defer purchase for greater clarity on schedule or conditions will pay a premium to ski (see Diagram 1). This decision flipped the traditional pricing model upside down, but better aligned with the long term viability of the company by giving loyal skiers the best value. The move toward greater season pass sales also helps lessen the weather dependency of the company’s revenue stream, adding better clarity and predictability to a highly seasonal business. Season pass sales now contribute 40% to overall lift revenue compared to a 23% contribution just 10 years ago, and Vail’s EBITDA (earnings before interest, taxes, depreciation, and amortization) has more than doubled to $450 million from $190 million in 2006.
Source: Vail Resorts 2016 Investors’ Conference, March 15, 2016
The additional cash flow has been reinvested (see Diagram 2) into continued enhancement of the resort network, thereby enhancing pass holders’ value. This string of acquisitions was recently extended by the purchase of Whistler Blackcomb in October 2016. We see many businesses make acquisitions just to get larger, but Vail intelligently enhances their season pass by thoughtfully purchasing resorts located near population centers and an international airport. The company utilizes each pool of potential visitors as an opportunity to drive volume, and the Epic Pass is priced to be attractive to both the local and destination groups. They have acquired mountains to round out each region’s portfolio and amass enough regional scale and market share to be a leading competitor. They are now well-represented in Colorado (2 hours from the Denver airport), Utah (30-45 minutes from the Salt Lake City airport), Lake Tahoe (3.5 hours from the Bay Area and 1 hour from the Reno airport), and British Columbia (2 hours from the Vancouver airport). The added regions have also helped de-risk the revenue stream by diversifying local weather exposure. The most recent example of weather-related challenges took place in Lake Tahoe during the 2013/2014 and 2014/2015 ski seasons when snow declined 70% and 40%, respectively, causing regional skier visits to decline 16% each season for Vail. Despite these challenges, strong results from Colorado and Utah along with exceptional cost management helped mitigate the earnings impact, and Epic Pass holders were pleased to have additional resort and region options.
Source: Vail Resorts 2016 Investors’ Conference, March 15, 2016
With additional size and scale comes the opportunity for other intelligent investments. Data collection has been a significant focus for Vail in recent years, which has enhanced the company’s ability to offer its customers what they want due to better knowledge regarding what they value. Vail has improved its collection of information on ticket purchases from 52% in 2014 to 96% in 2016. It is able to track skiers on mountain through RFID-enabled tickets (radio frequency identification), which helps the company make informed investments for uphill capacity, restaurants, and other features. All of these components factor into knowing the customer and offering better value to each individual, which both improves loyalty and helps Vail gain market share. The smaller regional resorts shown in Diagram 2 – Wilmot (Chicago), Afton Alps (Minneapolis), and Mt. Brighton (Detroit) – represent additional opportunities to better understand the customer, collect information, and improve loyalty. Many competitors could not make investments of this kind profitable, but Vail has the product offering to capitalize on the enhanced customer data.
Over the past decade, Vail has built a network of properties which is unrivaled. It has provided its customers with industry-leading value and made intelligent strategic decisions to continue to enhance its offering. With a reasonable valuation, compelling opportunities for investment, a strong and growing moat, and an astute and aligned management team, Vail Resorts is a business we are pleased to patiently own for the long term.
As of December 31, 2016, Diamond Hill owned shares of MTN.
Originally published on January 19, 2017.
The views expressed are those of the research analyst as of January 2017, are subject to change, and may differ from the views of other research analysts, portfolio managers or the firm as a whole. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice.