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8th annual Spring value investing congress
May 7, 2013 • Las Vegas, NV I like big … and I cannot lie
Vitaliy Katsenelson, Investment Management Associates •

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Join us for the 9th Annual New York Value Investing Congress!

I Like Big … and I Cannot Lie
By Vitaliy Katsenelson, CFA CIO Investment Management Associates, Inc.

Sideways Market Update

5 Years Later

Sideways Market Keeps Marching On The “bear” markets were actually sideways markets and happened ½ the time 4 .

Market Cycles 101: Secular vs Cyclical • • Secular markets – last 5 years or longer Cyclical markets – last less than 5 years. 1966-1982 Secular Sideways Market Cyclical head fakes Cyclical Markets: . Take place inside of secular markets.

Dow Jones Since 1999 .

Market Cycles 101: P/E and E’s E Bull Markets P/E Start at P/E End at P/E Low High Returns Adding 2 positives = great returns Net-net earnings growth is cancelled out by P/E decline = a lot of volatility and no returns Adding 2 negatives = horrible returns ↑ ↑ ↑ ↓ Sideways Markets High Low Bear Markets ↓ ↓ High Low .

But… .Stock Market is Only Cheap if You… S&P is at 18 times 12 months trailing earnings – above average but not too expensive.

decline).… If Profit Margins Can Stay at All Tim High Earnings are inflated and corporate profit margins are unsustainable. Profit margins will mean-revert (in this case. . Profit margins mean-revert because capitalism works: higher profits attract more competition and … earnings decline.

Earnings Growth = GDP Growth 1950 .2010 .In the Long Run.

In the Short Run? 1999 .2012 .

S&P 500 Earnings Last 10 Years • 𝑥 = −𝑏± 𝑏2 −4𝑎𝑐 2𝑎 Ex-Crisis Average 10 Year “E” Actual Average 10 Year “E” $65 $61 $50 .

𝑃𝐸 = 𝑃𝑟𝑖𝑐𝑒 (𝑆&𝑃 500 𝐴𝑝𝑟𝑖𝑙 30.590 = 65 26 25 𝑃𝐸 = Stock Market is Very Expensive!!! .590 = 61 1. 2013) 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 (𝑆&𝑃 10 𝑌𝑒𝑎𝑟 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 2003 − 2012) 𝑃𝐸 = 38% 1.

Europe. QEs ) – maybe or maybe not. Berkshire Hathaway Annual Meeting 2013 P/E continues to expand – unlikely: past secular bull markets ended at this type of valuation. Japan debt bubble. “If you are not confused about the economy. .” Charlie Munger. Given the “exciting” macro picture (China bubble.We Are in a Secular Bull Market If: Profit margins continue to expand or at least maintain current level – unlikely Revenues (GDP) continue to grow at a good pace. you don’t understand it.

Sorry. could not spend more time on sideways markets. but you can read about them in 7 languages: .

I Like BIG Dividends and I cannot Lie .

Click Here to Watch Video on YouTube .

Why You Should LOVE Dividends Dividends are important for two reasons: – Quantitative – historically. over 100 plus years.Yogi Berra / Jan L. In sideways markets. van de Snepscheut . But. – Qualitative – is just as important. in practice. half of stock returns for came from dividends. there is no difference between theory and practice. A. dividends constitute a larger (over 90%) portion of total return. there is. . In theory. creates another fixed cost (not unlike a rent expense) for a company – thus management has to be more frugal – and it also limits management's ability to do stupid things with cash flows.

We thought it was not doable. equities.S. we were able to identify a diversified portfolio of 20 stocks that cleared the 7-percent hurdle. – A quarter is in master limited partnerships – The rest is in plain-vanilla U. . • Portfolio composition: – Half of the portfolio is in European (mostly multinational) stocks. • To our surprise.Yes You Can! • A few months ago my firm was asked if we could come up with a defensive stock portfolio that would yield more than 7 percent.

Whistler and Mt. The largest ski resort in North America and #1 in everything: Ranked #1 by SKI Magazine – beating Vail. Blackcomb.average snowfall (1. Breckenridge … # 1 .apologies per square mile .280 feet) # 1 .largest number of annual visits (2. Aspen/Snowmass.5 million winter and summer) # 1 .most lifts (37) # 1 .171 acres) # 1 .largest vertical drop (5.Whistler Blackcomb • • Owns a 75% direct interest in two connected mountains an hour and a half from Vancouver … predictably named Mt.largest skiable area (8.192 cm) # 1 .

Popularity of Skiing is on the Rise Estimated U. Ski Visits Source: Kottke National End of Season Survey.ORG . NSAA.S.

after all. .REASON 1: Alpine skiing is the laziest winter sport ever invented – gravity takes you down. some may argue that bobsledding is the laziest winter sport. (Okay. the lift takes you back up. you don’t even have to stand).

She started skiing when she was 3. parabolic-shaped skis made skiing much easier and thus accessible to a much larger demographic (from little kids like my 7-year-old daughter Hannah. . This is my daughter Hannah in in Vail in 2011. to baby boomers).REASON 2: The skiing experience has improved dramatically since the mid-1990s: shorter. to middle-aged couch potatoes like me.

. Can ski together with kids or put them in the ski school (the only school they’ll beg you to go to). Pictures: Katsenelson family skiing in Keystone and Vail.REASON 3: Great family sport.

REASON 4: Those who wish they were surfing can now snowboard. Finally something for surfers to do in the winter time. .

as we say in finance.REASON 5: Detachable (high-speed) lifts are two and a half times faster than the old fixed-grip lifts. – to have a put option on snowfall). . OLD NEW Note: Advances in snow-making equipment allow resort operators to have much better control over something they had little control of in the past: snow (or. Allows the mountain to open sooner and close later. They shorten the wait for the lift and the time spent on the lift – leaving you more time to ski.

it is the resort rated #1 in North America in 2013 by SKI magazine. . but just imagine how beautiful the Whistler-Blackcomb mountains are.REASON 6: Who Doesn’t Want to Escape to This? I took these pictures at Keystone in Colorado. After all.

Here is Whistler Blackcomb Pictures from .whistlerblackcomb.

Intrawest was overleveraged and was forced to IPO Whistler Blackcomb in November 2010. etc. KSL purchase IPO .). KSL now has two board seats.75 a share in 2012 (very close to current price).Whistler Blackcomb’s Story Was owned by private equity Intrawest. Intrawest sold its remaining 24% interest to KSL Capital Partners (owner of luxury resorts out of Denver) for $12. Snowshoe. Winter Park. which also owned other assets (Steamboat.

and Whistler Blackcomb is one of them. Number of ski resorts in North America has declined from 735 in 1982 to 486 in 2011. Working to renew leases for 60 years. • Leases the mountain from British Columbia. only a handful are true brands.Whistler Blackcomb’s Story • WB is a great and unique asset: no new competitors in 30+ years. . Pays 2% of ticket sales to BC. last three significant competitors entered in 1981. Leases expire in 2029-2032. Out of the 486.

WB is not a real estate development company nor does it own hotels. .WB’s Revenue Composition 40% of ski revenues come from season passes which are sold before the season starts. Unlike Vail Resorts. This is a (relatively) asset-light model that produces much higher free cash flows than Vail Resorts.

Whistler Blackcomb Became an Even More Valuable Asset after the Vancouver Olympics .

REASON 1: The government spent $500 million on improving Highway 99 from Vancouver to WB. which shortened the commute by 30 minutes and increased visitations by regional visitors by 250 thousand (a 23% increase). .

REASON 2: Increased awareness and cemented the reputation of Whistler Blackcomb’s brand (after all. .5 billion people). the Olympics were only watched by 3.

and unlike locals they don’t pack their own lunches and thus spend more money in restaurants). . Usually less global economy-sensitive.Regional vs. the US. Pay twice as much per lift ticket per day as locals. etc.). Australia. and other regions (Asia. who travel from other parts of Canada. Spend about 30% more per visit (rent skis. – “Destination” visitors. Europe. Lower average ticket price and spending per visit but more stable and recurring revenues. “Destination” Visitors WB’s mountains are blessed by two types of visitors: – Regional visitors – the ones that travel less than 250 miles. go to ski schools.

the decline in the euro. They will come back as the global economy improves. The weak global economy.Opportunity with Destination Visitors Destination Visits The number of destination visits dropped off by 400 thousand over the last five years. . and the strength of the Canadian dollar were responsible for the decline.

2. which will result in an effective 7% price increase in 2014.9% a year from 1999 to 2010.WB Has Significant Pricing Power WB has enormous pricing power. .9% Source: WB’s filings British Columbia lowered its tax rate for ticket sales from 12% to 5%. so WB will keep its pre-tax ticket price flat. Raised prices 2. In an inflationary environment it should be able to pass through higher costs in the form of higher prices. Visitors have been conditioned to expect rising ticket prices.

This creates a very interesting dynamic: peak hotel occupancy is only 62% – hotels have a significant incentive to promote WB resorts. 38% empty rooms creates an enormous incentive. summer tickets are only 15% of total ski ticket sales. . however. • WB doesn’t own hotels.Opportunities • Summer visits to WB resorts exceed winter visits. in fact. Vancouver is beautiful in the summer – a lot less rain! WB is working on providing new activities to get more people to the top of the mountain.

Plenty of Growth Left • Per WB’s management: currently developed terrain can accommodate an additional 300k winter visits. Source: WB’s management presentation . • Then (per image below) WB still has room for expansion.

” – WB’s management. But for those who still worry: If global warming submerges Seattle and British Columbia. • .Risk: Global Warming No Worries! • “WB has not experienced a decrease in snowfall in the last two decades. then WB’s real estate will become even more valuable as tens of millions of people migrate to higher ground.

What About a Canadian Housing Bubble? • The biggest risk to WB: a Canadian housing bubble. liked it. thus driving earnings and dividends in US dollars down. • The weaker Canadian dollar will make WB more affordable and will bring destination visitors back. • The bursting of the bubble will reduce visits by local visitors (as a proxy. Canadians looked at the US housing bubble. ski visits in the US declined about 6% when our latest housing bubble burst) and drive the Canadian dollar down. and created one of their own. .

What Is the Market Missing? .Such a Great Asset.

.Inflated Depreciation/Amortization Depresses Earnings Because of the IPO. This revaluation doubled depreciation and amortization expense. It looks expensive on EPS (20 plus times earnings) but is very cheap on free cash flows (in single digits). which significantly exceeds maintenance capital expenditures. WB had to revalue its assets.

Tried to Kill It But Could Not Note: In 2013 WB will spend $18mm to double capacity of two of its lifts. we estimate them to be on average about $6mm a year and $16mm a year in “Great” scenario as WB will have to expand the mountain. Growth capital expenditures are lumpy. .

4% with optionality for growth if/when the global economy improves.4%) – On an absolute basis – the worst-case scenario is 9.2 times – Free cash flows / interest expense: 3 times Valuing WB doesn’t require nearly as much imagination as does valuing Amazon: – Cheap on a relative basis – Vail Resorts is almost 2x more expensive on Enterprise Value / EBITDA and is 44x Price / Free Cash Flows (dividend yield 1.Summary • • Great. Solid balance sheet – Debt to EBITDA: 3. and growing business with pricing power.3 times free cash flows WB is an inflation-protected. • • . unique. significantly undervalued bond yielding 7.

Thank You! • You can browse the full version of the sideways market presentation: .ly/swpresentation • 2008 Value Investing Congress presentation: • Read articles and sign up for emails: http://ContrarianEdge.