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<DAILY TROUBLE>
Friday, February 12, 1999
American Skiing Company
<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SKI)") else Response.Write("(NYSE: SKI)") end if %>
Phone: 207-824-8100
Website: http://www.peaks.com
Price (2/11/99): $4 3/4
HOW DID IT FIND TROUBLE?
After coming public in October 1997 at $18 a share, American Skiing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SKI)") else Response.Write("(NYSE: SKI)") end if %> embodied the high hopes Wall Street had for the consolidation of the ski industry. Unfortunately for those who bought into the public offering, it has been mostly downhill ever since.
Over the past couple years, operating ski resorts has gone from being a largely "mom 'n pop" industry to an industry run by corporate giants. American Skiing, one of those giants, continued on its rabid hunt for resorts by quickly deploying the cash from its public offering towards purchasing the large and established resorts of Steamboat and Heavenly.
American Skiing is not only extremely aggressive in acquiring resorts, the company is ambitiously developing its existing properties. Not surprisingly, a decent chunk of debt has arisen from this vigorous investment activity, and these high levels of leverage have investors thinking twice about the common stock.
Adding to the uncertainty is an unusually warm and dry season in Colorado and the Northeast, dampening expected results for the quarter ended in December. The weather has been so uncooperative that less than half of the company's skiable terrain was open on December 31, compared to 84% of the capacity American Skiing had available at the same time last year. Revenue is expected to be down roughly 5%, while EBITDA (earnings before interest, taxes, depreciation, and amortization) is expected to be lighter by approximately 35% versus 1997's fourth calendar quarter. With the margin for error as sharp as a ski edge due to the debt, it has only spelled trouble.
BUSINESS DESCRIPTION
American Skiing is one of the largest ski resort operators in the nation. The company owns and operates nine resorts, including its banner properties of Killington in Vermont, Steamboat in Colorado, and Heavenly at Lake Tahoe. The company's CEO, Les Otten, has been an extremely active wheeler and dealer, parlaying ownership in one relatively small mountain, Sunday River in Maine, into hosting roughly 10% of all North American skier visits today.
As with most mountain resort operators, real estate development is also an important part of the company's business plan.
FINANCIAL FACTS
Income Statement
12-month sales: $350.7 million
12-month income: ($9.1 million)
12-month EPS: (0.32)*
Profit Margin: N/A
Market Cap: $143.9 million
Enterprise Value: $483.2 million
(*EPS number from Bloomberg.)
Balance Sheet
Cash: $9.0 million
Current Assets: $40.5 million
Current Liabilities: $158.4 million
Long-term Debt: $348.3 million
Ratios
Price-to-earnings: N/A
Price-to-sales: 0.4
EV-to-sales: 1.4
HOW COULD YOU HAVE SEEN IT COMING?
If the risky nature of an investment in American Skiing was not readily visible to the untrained eye, it could have been seen by flipping through a recent Industry Snapshot published when the stock was near $10. In the issue concerning the Ski Industry, the investment worthiness of American Skiing was questioned when the company was balanced against peers such as Intrawest <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IDR)") else Response.Write("(NYSE: IDR)") end if %> and Vail Resorts <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTN)") else Response.Write("(NYSE: MTN)") end if %>. Many times, performing comparative research pays off.
Another way to have questioned the company's prospects would have been to look at the financial statements and the debt American Skiing was taking on. In each of the past six fiscal years, the company's cash flow from operations has been exceeded by the cash used in investing activities, and debt has continued to march towards the sky. Another surefire sign that perhaps the company bit off more than it can chew is the interest coverage ratio. In the past 12 months, the net interest expense has exceeded the company's cash flow -- seldom a good sign.
Not only is skiing a seasonal business, its operations also depend on Mother Nature to deliver the goods every winter. This season, she's been brutal on the entire industry. Almost all resorts have some artificial snowmaking system in place, but only using snowmakers is almost like trying to put out a forest fire with a garden hose. It may help the cause slightly, but the true salvation falls from the skies. To make a long story short, those who kept an eye on the weather or on the ski reports could have easily seen the early season weakness the company will report shortly.
WHERE TO FROM HERE?
It's difficult to get a grasp on how to value American Skiing for three reasons. First, a large chunk of the company's business comes from real estate sales, the timing of which is extremely difficult to predict. Second, the seasonality of the business makes spotting a trend in profitability rather difficult until after the fact. Finally, the relatively large degree of leverage reduces the margin for error when doing financial forecasting. Wall Street rarely bids up stocks with high degrees of uncertainty.
American Skiing is trading below book value at these levels, which may excite a few value investors. Nevertheless, part of the reason for the discount is because net debt exceeds equity and continues to grow. Plus, book value can quickly evaporate if a company comes in with negative earnings, which American Skiing is expected to report in the current fiscal year.
While the company's finances look a little bruised at this point, there are some bright spots ahead for American Skiing. The company's investment activity at some of its properties should start to wind down in the next year or two, which should bring net cash flow closer to positive levels.
On the other hand, one of the American Skiing's resorts, The Canyons, will continue to burn cash in the short term, as it undergoes one of the boldest expansions of any ski resort in the country. American Skiing is in the process of turning the resort near Park City, Utah, from a sleepy day-skiing property to one of the largest destination resorts in the country. American Skiing hopes that the resort's proximity to the 2002 Olympics will propel its reputation and profitability to the top tiers in the industry, increasing the value of both the operations and the vast amounts of real estate the company owns near the resort.
Investing in American Skiing at these levels could be like taking a winter day at one of the company's properties. If the company's on-mountain investments and big bets on itself land safely, it could be an absolutely exhilarating experience to own the stock. On the other hand, investors may find themselves cold, sore, and broke if the debt continues to spiral out of control. Only those with an adventurous side should be interested in American Skiing at this point.
-- Paul Larson
([email protected])
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