I don’t run, I don’t lift weights, and I
don’t frequent a gym. I admire those who do, but
that’s not for me. In the summer I ride a bicycle to work;
in the winter my kids and I ski.
Alpine skiing is probably the laziest winter sport ever
invented — gravity takes you down, the lift takes you back
up. (Okay, some may argue that bobsledding is the laziest
winter sport; after all, you don't even have to stand.) The
skiing experience has improved dramatically over the past few
decades. Shorter, parabolic-shaped skis have made the sport
much easier and thus accessible to a much larger demographic,
including couch potatoes like me. High-speed lifts are two and
a half times faster than the old fixed-grip lifts, giving
skiers more time on the slopes.
These improvements have made ski resorts more popular. Ski
venue visits grew about 2 percent a year over the past decade.
I live in Denver and frequent local mountains, so I looked at
Vail Resorts as an investment. The only publicly traded ski
resort in the U.S., Vail is an extremely well managed and
unique asset, but it always looks expensive and lacks free cash
flows.
I recently stumbled on another, no-less-intriguing ski
resort: Whistler Blackcomb in British Columbia. The owner
connected two mountains (predictably named Whistler and
Blackcomb) 90 minutes from Vancouver to create the largest ski
resort in North America. If the name sounds familiar, it is:
Whistler Blackcomb hosted the alpine events for the 2010 Winter
Olympics.
The Olympics had a profound impact on the resort. The
Canadian government spent half a billion dollars on improving
Highway 99 from Vancouver to Whistler Blackcomb, and this has
increased visits by locals by 300,000 a year. The Olympics also
increased awareness and cemented the reputation of
Whistler Blackcomb’s brand. Last, having the
winter games at the resort increased lodging capacity.
Unlike Vail Resorts, Whistler Blackcomb is not a real estate
development company, nor does it own hotels. It has an
asset-light model that produces much higher free cash flows
than Vail. Half of its revenue comes from selling tickets, and
the rest is from ski rentals, ski schools and restaurants. It
leases the mountains from British Columbia and pays the
province a small royalty on ticket sales. Hotel occupancy is
now just 62 percent during peak season. That could change. The
fact that Whistler Blackcomb doesn’t own hotels creates an
interesting dynamic: Hotels have a considerable incentive to
promote its resorts. I'd argue that a 38 percent vacancy rate
creates an enormous incentive.
Whistler Blackcomb’s mountains attract two types of
visitor: locals — those who travel less than 250 miles
— and destination visitors, who travel from further points
in Canada, the U.S., Europe and other regions. The number of
annual destination visits dropped by 200,000 over the past five
years as a result of the weak global economy, decline in the
euro and strength of the Canadian dollar.
For ski resorts, destination visitors are the gravy train.
They spend about 30 percent more per visit than locals do, on
ski rentals, ski lessons and restaurant meals (locals often
pack their lunch). They also pay a much higher price per lift
ticket per day than locals. If Whistler Blackcomb can regain
the destination visitors it lost, its free cash flow should
grow by 20 to 30 percent.
A good ski resort is a scarce asset. Though skiing is a
discretionary activity, ski resorts have had significant
pricing power. They have raised prices about 3 percent a year
forever. Whistler Blackcomb serves an upscale demographic that
has been conditioned to expect higher ticket prices.
Until recently, Whistler Blackcomb was owned by resort
operator Intrawest. But Intrawest got overleveraged and was
forced to do an IPO of Whistler Blackcomb in November 2010. As
a result of the IPO, all assets had to be revalued, and
depreciation and amortization are far in excess of capital
expenditures. Thus earnings meaningfully understate Whistler
Blackcomb’s true moneymaking power. If valued on earnings,
it trades at a very unexciting price-earnings ratio of 30;
however, if valued on free cash flow, it trades at a multiple
of 10.
The biggest risk facing Whistler Blackcomb is the Canadian
economy — specifically, the Canadian housing bubble. The
Canadians looked at the U.S. housing bubble, liked it and made
it their own. The bursting of the bubble would decrease visits
by locals and drive down the Canadian dollar, reducing earnings
and dividends in U.S. dollars. But there would be a silver
lining: A weaker Canadian dollar would make Whistler Blackcomb
more affordable and bring back destination visitors.
In a recent column I mentioned the importance of dividends.
Well, Whistler Blackcomb is a perfect high-quality,
high-dividend-yielding stock. In fact, I look at it as the
equivalent of an inflation-protected, undervalued bond yielding
7.4 percent, with optionality for growth when the global
economy improves.
Vitaliy Katsenelson (vk@imausa.com) is CIO at Investment
Management Associates in Denver and author of
The Little Book of Sideways Markets.