Investors who hit the slopes last winter were rewarded with some of the best skiing conditions in recent years. But this summer may be the better time to buy shares of a ski resort operator.
Shares of Intrawest Resorts (SNOW), which operates resorts including Steamboat, Stratton, and Snowshoe, have declined 5 percent since their initial public offering in late January. While the company posted a healthy 7.9 percent increase in skier visits during the November-April ski season, some investors are concerned about Intrawest's higher-than average leverage and its short track record in this latest incarnation as a public company.
Even so, Intrawest has several long-term advantages that should get more investors lined up to buy the stock. First, there has been a steady decline in the number of new resorts in North America over the few last decades and that trend looks unlikely to reverse. New resorts would only be possible in a small number of locations and require very large upfront investments. Many existing resort companies have extended deals with the government to operate on national forest property.
And while the number of skiers isn't likely to grow much, they tend to be high-income individuals. BofA Merill Lynch points out that the ski industry often serves households with incomes above $100,000. At some high-end resorts, household incomes can average $250,000 or more, according to a research note for investors.
That dynamic should help Intrawest increase ticket prices further over time without much resistance from customers. While Intrawest operates resorts in some of the most desirable locations across North America, its ticket prices are lower than those of major rivals. Intrawest's effective ticket price is $45.92 per skier per day, compared with $56.02 for Vail Resorts (MTN) and $51.65 for Whistler-Blackcomb, according to BofA Merrill Lynch.
Narrowing the gap with rivals by a few dollars doesn't appear all that difficult given the overall cost of a ski trip. Including airfare to states like Colorado and often-expensive lodging, lift tickets can essentially be a drop in the bucket. And while Intrawest probably won't match Vail, the latter will likely continue raising prices, allowing both to benefit, analysts say.
While normal ski resorts account for the majority of Intrawest's business, the company's ultra-high-end helicopter skiing group contributes about a fifth of operating income. The business, called Canadian Mountain Holidays, runs the largest heli-skiing operation in North America, including a fleet of 40 helicopters.
Heli-skiing offers a couple of big benefits to Intrawest. First, heli-skiers tend to care even less about prices given their high incomes and dedication to the sport. The group also has a booking window that runs one to two years in advance, creating unusual clarity on future skiing revenue, according to Joel Simkins, an analyst at Credit Suisse. And Intrawest has scope to expand on its roughly 40 percent share of the Canadian heli-skiing business, given its access to capital and specialization, Simkins said.
There's no denying that any ski business is vulnerable to weather conditions during its short operating window, which is essentially a few months a year. That concern will probably keep a limit on valuations for most any resort operator over the medium term.
Intrawest didn't immediately respond to a request from comment.
Yet after its weak share performance in the last few months, Intrawest is one of the cheapest stocks in the leisure sector. The company's enterprise value is just 8.5 times consensus earnings before interest, taxes, depreciation and amortization for the year through June 2015. Accounting for the company's land bank, which has a book value of $153 million, the multiple drops to just 7.2 times. Come next winter, it may be too late to snag such a deal.
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