3 Reasons to Sell MTN and 1 Stock to Buy Instead

Over the past six months, Vail Resorts’s stock price fell to $134.59. Shareholders have lost 17.4% of their capital, which is disappointing considering the S&P 500 has climbed by 10.1%. This might have investors contemplating their next move.

Is now the time to buy Vail Resorts, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free for active Edge members.

Why Do We Think Vail Resorts Will Underperform?

Even though the stock has become cheaper, we're cautious about Vail Resorts. Here are three reasons we avoid MTN and a stock we'd rather own.

1. Inability to Grow Skier Visits Points to Weak Demand

Revenue growth can be broken down into changes in price and volume (for companies like Vail Resorts, our preferred volume metric is skier visits). While both are important, the latter is the most critical to analyze because prices have a ceiling.

Over the last two years, Vail Resorts failed to grow its skier visits, which came in at 739,000 in the latest quarter. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Vail Resorts might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Vail Resorts has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 11.3%, lousy for a consumer discretionary business.

3. New Investments Bear Fruit as ROIC Jumps

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Vail Resorts’s ROIC averaged 2.9 percentage point increases each year. This is a good sign, and we hope the company can continue improving.

Final Judgment

We cheer for all companies serving everyday consumers, but in the case of Vail Resorts, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 19.4× forward P/E (or $134.59 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are superior stocks to buy right now. Let us point you toward one of Charlie Munger’s all-time favorite businesses.

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