Prepared by Stephanie of team BAD BEAT Investing

Vail Resorts, Inc. (NYSE:MTN) stock is one we have not covered in some time. When we last covered it, we recommended a Buy at the end of 2018. The stock ran nicely in 2019, and 2020 has been, well, 2020. The stock has started rebounding off of the bottom, but the resort company is facing solid pressure from the lack of interested resort goers. The company has just reported earnings, and we want to check back in on the name. Ultimately, given the expected weakness for fiscal Q4, and likely fiscal Q1, we think the shares have to pull back. The market has had a major run, but the fundamentals here do not add up. At best, we have to look out to the second half of fiscal 2021. Money can be made here, but let it come down well under $200. Let us discuss.

Entering a slower point of year

Of course, Q3 is part of the busy season, and Q4, which is underway, is looking rough. This report came following a mostly decent Q2 and good Q1. Let’s talk some financials. With COVID-19, things were up in the air. No one really knew how good or bad the quarter would be. It was tough to handicap. We did know that relative to last year, it was going to be rather disgusting, to put it plainly. The top line was down sizeably, as expected. The result was a bit better than consensus, beating by about $67 million, but was down 27.5%, hitting $694 million. This decline was better than expected, and that helped deliver a better-than-expected bottom line. Net income was $152.5 million for the third fiscal quarter of 2020 compared to net income attributable to Vail Resorts, Inc. of $292.1 million in the same period in the prior year, primarily as a result of the negative impacts of COVID-19.

Well, yes, on the surface, that is pain. That is a big decline. On an EPS basis, it is also painful. Vail Resorts reported EBITDA of $304.4 million. This is significantly lower compared to the EBITDA of $480.7 million for the same period in the prior year, primarily as a result of the negative impacts of COVID-19. This was offset by a lot of cost actions implemented to reduce expenses. On a per share basis, earnings were much better than expected and came in at $4.20, but were lower from last year.

The pattern looks bad and Q4 is looking off to a rough start, which is why we are looking past it to the back half of fiscal 2021 and want to do some buying on a sizable pullback, but there are some issues to keep in mind.

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There is pain ahead operationally

One of the things we are really interested in is the sources of sales for Vail. Specifically, we have interest in season passholders and trends in their activities/spending/visitation habits. Season passholders represent the highest-valued customers for Vail, so we think it important to look at them closely. Season passholders visit multiple times a year, may stay in lodging, and can drive food and beverage sales higher. As such, investors must pay close attention to passholder trends.

The CEO, Rob Katz, stated:

We are planning to be operational for the North American summer and Australian ski season in late June or early July, which could vary by resort, and opening dates for each business are subject to new information and public health guidance with regard to COVID-19. We expect that our results in the fourth quarter of fiscal 2020 will be materially negatively impacted by the travel environment and we will see lower visitation to our resort properties.”

That is a pretty big statement, suggesting things are going to be painful in Q4 and that investors should prepare for terrible numbers.

Season pass sales matter

As we said above, season pass sales matter for the company. The thing that is hurting with the compounded issues of passholders not coming during March, April and May is that not only are they not spending on food and lodging etc., but now the company is providing credits to 2019/2020 North American passholders to apply toward the purchase of a 2020/2021 pass product.

This hurts future revenues. Why? Well, season passes make up a ton of revenue. Season passholders for the present year will receive a minimum credit of 20% toward next season’s pass. For season passholders who used their pass less than five days, they will be eligible for higher credits up to a maximum of 80% for season passholders who did not use their season pass at all. Why? Well, this is a result of the early closure this season due to COVID-19. From an accounting standpoint, the company is delaying the recognition of approximately $121 million of its deferred pass revenue, as well as approximately $3 million of related deferred costs that would have been recognized in the remainder of fiscal 2020 and will now be recognized primarily in the second and third quarters of fiscal 2021. The reason for this is really to partially or fully offset the negative impact of the credits being offered to passholders, depending upon the final usage of such credits towards the purchase of 2020/2021 North American pass products. We will see.

On top of that, season pass insurance is now free. The company is offering its so-called Epic Coverage free for all North American passholders, and it completely replaces the need to purchase pass insurance. Epic Coverage provides refunds in the unlikely event of certain resort closures, giving passholders a refund for any portion of the season that is lost. Additionally, Epic Coverage provides a refund for personal circumstances covered by pass insurance for eligible injuries, job losses and many other personal events. This is going to weigh severely.

The impact makes handicapping the future quarter or two’s revenue and earnings even more difficult. Hopefully, things are all open by July, but getting people out to resorts, especially in the slower summer season, is easier said than done.

Our recommendation

So, what should you do? We think the stock is still a buy under $200 but even better under $175. This valuation would properly account for a possible 33% or more decline in earnings for the year, with anticipated ramping of EPS in later fiscal 2021. Management has taken pay cuts, benefits are being slowed, costs are being cut left and right. While the next two quarters will be rough, take advantage of the next real selloff. We think that the stock gets back over $200 later this year.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.