"Price is what you pay. Value is what you get."
As Real Money's resident ski bum and Park City Utah local, I'd like to offer some behind-the- scenes information on last week's announced acquisition of Powdr Corp's Park City Mountain Resort by Vail Resorts (MTN). In case you missed the story altogether, simply knowing that MTN's stock price surged roughly 14% over the two days following the news, and Moody's declaration that Vail's decision was credit positive should tell you what current investors think of the deal.
If you flip through the various reports on the acquisition you'll read how Vail acquired all the assets of Greater Park City Company, including already approved zoning for roughly 700,000 square feet of residential and commercial development, all parking lots, lifts and water rights.
Everyone understands the value and importance of acquiring real estate and access points (parking lots), but for those unfamiliar with the need for water rights when it comes to running a ski resort, let me explain. During low snow years, the ability for a ski resort to produce massive amounts of man-made snow can make or break their season (from both an attendance and revenue standpoint). The past three seasons have, as far as locals are concerned, been underwhelming from a snowfall perspective. But thanks to generous water rights and state-of-the-art snowmaking, Park City Mountain Resort has always had sufficient (early-season) skiable terrain open. If you're an investor in MTN, you should take great comfort in knowing that Vail's purchase of PCMR came with these water rights.
You'll also read about Vail's plans (for the 2015-1016 ski season) to connect Park City Mountain Resort with neighboring ski resort Canyons, also a Vail Resorts property, to form the single largest ski area in the country. These are all positive developments for Vail Resorts' investors, and in my view, the economic development of Park City as a whole.
The story, however, doesn't end there.
Unbeknownst to most living outside Park City and Salt Lake City, there's a massive effort going on to build support for a proposal that would connect, via lift service, seven Wasatch Mountain Range ski areas. The ski areas in question are Little Cottonwood's Alta and Snowbird ski resorts, Big Cottonwood's Brighton and Solitude ski resorts and Park City's Deer Valley, Park City Mountain Resort and Canyons ski resorts. The proposed project is called Wasatch One. If completed, it would provide skiers the option to purchase a single lift pass that would then grant them access to roughly 18,000 skiable acres. The goal behind this initiative is to create to a European-style ski experience for U.S. skiers.
As any Park City local could probably attest, there's been chatter about linking up the area's major resorts for years. Environmentalists and wilderness advocates have traditionally resisted such proposals because they worry about protecting the watershed and public lands. What appears to be different with the current proposal, Wasatch One, from past ideas, is that project leaders and proponents are making the effort to work with environmental groups to assure them that the ski link could be completed without damaging the areas of pristine back country.
And as far as ski resort logistics are concerned, the simple fact that Powdr Corp and Vail Resorts (along with Talisker) are no longer stuck in a courtroom battling over Park City Mountain Resort further increases the odds that Wasatch One could become a reality. I am familiar with the proposed locations for the various ski lifts that would connect the seven resorts, and none of them are all that tricky. This ambitious project has a real shot at coming to fruition. And that, in my view, would provide huge long-term benefits to Vail Resorts and its shareholders.
Nailing down the profit potential behind this sort of initiative for Vail Resorts is obviously difficult. I believe it's logical to assume that net traffic to Utah ski areas would rise. And as far as the value of residential and commercial real estate Vail acquired from Powdr Corp, common sense tells us that it, too, should rise in value. Perhaps appreciably.
The bottom line is this: In purchasing Park City Mountain Resort from Powdr Corp, Vail Resorts has secured the specific property it required to create the largest single ski area in the US. Moreover, it further cemented its presence in growing and lucrative Park City ski scene.
Now, for what really matters. Would I buy the stock?
I'm afraid I can't get on board with initiating a position in MTN at current levels. There's no question the stock's short, intermediate and long-term trend is solidly bullish. But the stock's recent price momentum is running sufficiently red-hot that I believe on an intermediate timeframe, a blow-off-type high could be on the horizon.
Technical traders will note that the stock, on a daily, weekly and monthly timeframe, is significantly overbought on the Relative Strength Index. The stock is also trading incredibly close to the top of its roughly three-year rising price channel (see chart above). From a swing trading perspective, an extremely lengthy period of consolidation back down toward the $80 breakout level would be a very bullish development.
From a valuation standpoint, the stock is simply expensive. It really doesn't matter whether you measure the company from an earnings yield (1.23%), operating earnings yield (4.05%), free cash flow yield (4.04%), price to book value (3.5) or p/e perspective (roughly 80 TTM and 45 one year forward). They all say the same thing. You'll be paying a very high price to own a piece of MTN at current prices.
There's no question Vail made a fantastic business move in acquiring Park City Mountain Resort. But in the world of trading and investing, we must begin every decision with an unbiased and unemotional assessment of risk versus reward. And while Bank of America Merrill Lynch analyst Shaun Kelley noted the stock may see $100+ in the longer term on the back of last week's announced deal, I simply can't see the logic in chasing the stock at these current red-hot and overextended levels.
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