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


Market Cycles 101: Secular vs Cyclical
• • Secular markets – last 5 years or longer Cyclical markets – last less than 5 years. Take place inside of secular markets.

1966-1982 Secular Sideways Market

Cyclical head fakes

Cyclical Markets:

Dow Jones Since 1999

Market Cycles 101: P/E and E’s

Bull Markets


Start at P/E End at P/E
Low High

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



Bear Markets



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

… 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, decline). Profit margins mean-revert because capitalism works: higher profits attract more competition and … earnings decline.

In the Long Run, Earnings Growth = GDP Growth 1950 - 2010

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, 2013) 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 (𝑆&𝑃 10 𝑌𝑒𝑎𝑟 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 2003 − 2012) 𝑃𝐸


1,590 = 61 1,590 = 65

26 25 𝑃𝐸


Stock Market is Very Expensive!!!

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. Given the “exciting” macro picture (China bubble, Japan debt bubble, Europe, QEs ) – maybe or maybe not.

“If you are not confused about the economy, you don’t understand it.”
Charlie Munger, Berkshire Hathaway Annual Meeting 2013 P/E continues to expand – unlikely: past secular bull markets ended at this type of valuation.

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, half of stock returns for came from dividends. In sideways markets, dividends constitute a larger (over 90%) portion of total return. – Qualitative – is just as important; 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.

In theory, there is no difference between theory and practice. But, in practice, there is. - Yogi Berra / Jan L. A. van de Snepscheut

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. We thought it was not doable. • To our surprise, we were able to identify a diversified portfolio of 20 stocks that cleared the 7-percent hurdle. • Portfolio composition: – Half of the portfolio is in European (mostly multinational) stocks. – A quarter is in master limited partnerships – The rest is in plain-vanilla U.S. equities.

Whistler Blackcomb
• • Owns a 75% direct interest in two connected mountains an hour and a half from Vancouver … predictably named Mt. Whistler and Mt. Blackcomb. The largest ski resort in North America and #1 in everything: Ranked #1 by SKI Magazine – beating Vail, Aspen/Snowmass, Breckenridge … # 1 - largest skiable area (8,171 acres)

# 1 - average snowfall (1,192 cm)
# 1 - largest vertical drop (5,280 feet) # 1 - largest number of annual visits (2.5 million winter and summer) # 1 - most lifts (37) # 1 - apologies per square mile

Popularity of Skiing is on the Rise
Estimated U.S. Ski Visits

Source: Kottke National End of Season Survey, NSAA.ORG


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

The skiing experience has improved dramatically since the mid-1990s: shorter, 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, to middle-aged couch potatoes like me, to baby boomers).

This is my daughter Hannah in in Vail in 2011. She started skiing when she was 3.

Great family sport. 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.


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

Detachable (high-speed) lifts are two and a half times faster than the old fixed-grip lifts. They shorten the wait for the lift and the time spent on the lift – leaving you more time to ski.

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, as we say in finance, – to have a put option on snowfall). Allows the mountain to open sooner and close later.

Who Doesn’t Want to Escape to This?

I took these pictures at Keystone in Colorado, but just imagine how beautiful the Whistler-Blackcomb mountains are. After all, it is the resort rated #1 in North America in 2013 by SKI magazine.

Here is Whistler Blackcomb

Pictures from http://ww1.whistlerblackcomb.com/media/photos/photos.asp

Whistler Blackcomb’s Story
Was owned by private equity Intrawest, which also owned other assets (Steamboat, Winter Park, Snowshoe, etc.). Intrawest was overleveraged and was forced to IPO Whistler Blackcomb in November 2010. Intrawest sold its remaining 24% interest to KSL Capital Partners (owner of luxury resorts out of Denver) for $12.75 a share in 2012 (very close to current price). KSL now has two board seats.

KSL purchase

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

WB’s Revenue Composition

40% of ski revenues come from season passes which are sold before the season starts.

Unlike Vail Resorts, WB is not a real estate development company nor does it own hotels. 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

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).

Increased awareness and cemented the reputation of Whistler Blackcomb’s brand (after all, the Olympics were only watched by 3.5 billion people).

Regional vs. “Destination” Visitors
WB’s mountains are blessed by two types of visitors: – Regional visitors – the ones that travel less than 250 miles. Lower average ticket price and spending per visit but more stable and recurring revenues. Usually less global economy-sensitive.

– “Destination” visitors, who travel from other parts of Canada, the US, Europe, and other regions (Asia, Australia, etc.). Spend about 30% more per visit (rent skis, go to ski schools, and unlike locals they don’t pack their own lunches and thus spend more money in restaurants). Pay twice as much per lift ticket per day as locals.

Opportunity with Destination Visitors
Destination Visits

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

WB Has Significant Pricing Power
WB has enormous pricing power. Raised prices 2.9% a year from 1999 to 2010. Visitors have been conditioned to expect rising ticket prices. In an inflationary environment it should be able to pass through higher costs in the form of higher prices.


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, which will result in an effective 7% price increase in 2014.


• Summer visits to WB resorts exceed winter visits; however, summer tickets are only 15% of total ski ticket sales. 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.

• WB doesn’t own hotels. This creates a very interesting dynamic: peak hotel occupancy is only 62% – hotels have a significant incentive to promote WB resorts; in fact, 38% empty rooms creates an enormous incentive.

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

Source: WB’s management presentation

Risk: Global Warming
No Worries!
• “WB has not experienced a decrease in snowfall in the last two decades.” – WB’s management. But for those who still worry: If global warming submerges Seattle and British Columbia, 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. Canadians looked at the US housing bubble, liked it, and created one of their own. • The bursting of the bubble will reduce visits by local visitors (as a proxy, ski visits in the US declined about 6% when our latest housing bubble burst) and drive the Canadian dollar down, thus driving earnings and dividends in US dollars down.

• The weaker Canadian dollar will make WB more affordable and will bring destination visitors back.

Such a Great Asset. What Is the Market Missing?

Inflated Depreciation/Amortization Depresses Earnings

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

Tried to Kill It But Could Not

Note: In 2013 WB will spend $18mm to double capacity of two of its lifts. Growth capital expenditures are lumpy, 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.

• • Great, unique, and growing business with pricing power. Solid balance sheet – Debt to EBITDA: 3.2 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 1.4%) – On an absolute basis – the worst-case scenario is 9.3 times free cash flows WB is an inflation-protected, significantly undervalued bond yielding 7.4% with optionality for growth if/when the global economy improves.

Thank You!
• You can browse the full version of the sideways market presentation: http://bit.ly/swpresentation

• 2008 Value Investing Congress presentation: http://contrarianedge.com/presentation/
• Read articles and sign up for emails: http://ContrarianEdge.com

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