Since work on the 13F Screener has kept me busy, I haven't had time to do a formal writeup of my most-recent investment—Viad Corp (VVI). While only a 1.5% position, it's a good company trading at a very reasonable price, and I may buy more. But rather than do a full writeup, this time I'm posting a:
- VVI "Living Document" (running overview of operations, financials, management, valuation, etc.)
- VVI Valuation Model (pro forma financials, DCF, margin analysis, etc.)
Whenever I research a new company, I'll start by creating these two documents, which I then edit and add to as events and circumstances change. For the Living Document, I'll add links to other analyst write-ups, interesting reports or articles about the company/industry, interviews with management, and investor presentations. I'll also include a running list of highlights/lowlights from conference calls,10-Ks, and 10-Qs to see if management actually does what they say they're going to do.
For the Valuation Model , I create historical and pro forma financial statements, making conservative adjustments and estimates. Then I'll run a few models (e.g., DCF, Residual Earnings, EV/EBITDA) at various margin and growth rate assumptions. The goal here isn't to come up with an exact share price or multiple, but rather to see what range of values are likely, and if the current price affords a healthy margin of safety.
For Viad, I've published both documents below; alternatively, the Google Docs versions can be accessed via the links above.
Viad is a combination of two businesses: one is good and the other is very good. In recent years, management has focused on expanding margins and making strategic, bolt-on acquisitions. And so far, they’ve been successful—GAAP operating margin has expanded 80bps per year since 2009, and returns on equity have gone from 2% to 17%. The company’s balance sheet is relatively clean, cash flow is strong, and key performance metrics like revenue per customer are increasing. Viad has a dominant position in both markets in which it operates, making it more likely than not that these trends will continue.
But like any business, it is not without warts: management is fond of adjusted EBITDA #s; there are fairly regular—though minimal—restructuring and impairment charges; insider ownership is light; debt has increased; and the business is dependent upon tourism and corporate events, both of which are highly sensitive to downturns in the economy.
Therefore a 15x-18x earnings multiple seems reasonable. Viad currently trades for 11x 2020 estimates.
Viad operates two distinct businesses—GES & Pursuit:
GES (87% of total revenue, 57% of total operating income) Provides comprehensive range of live event (e.g., exhibitions, conferences, corporate events, and consumer events) services as well as a full suite of AV services like creative, technology, content, and kiosk design.
Pursuit (13% total revenue, 43% of total operating income) Collection of unique hotels, lodges, recreational attractions, and transportation services in Banff, Jasper, Denali, and Glacier National Parks.
GES focuses on trade show management and exhibition services including planning, installation, kiosk/exhibit design, audio and video, and on-site management. Customers include event organizers and corporate marketers.
- Second largest exhibition provider in the US w/ 30% marketshare (privately-held Freeman Company is #1)
- Duopolistic industry—VVI & Freeman control 80% of US industry profits
- Leading exhibition provider in Canada & the UK (45% - 55% marketshare)
- Client retention rate of over 90% (indicates high switching costs and/or high customer satisfaction) w/ contracts typically lasting 3-5 years
- Fragmented customer base (no customer accounts for > 6% of revenue)
- Currently under-penetrated in higher-margin/large TAM Conferences, Corporate Events, & Consumer Events
- 5% revenue CAGR since 2013
- Margins have expanded 50 bps per year since 2013
- CapEx = 2% of revenue
Bottom-line: Solid (but not stellar) business, with low-teens return on capital, 5% revenue growth, and some opportunity for margin expansion via acquisitions and operating improvements.
Pursuit is a collection of unique tourism assets such as hotels, attractions, tours, and transportation services in Banff, Jasper, Waterton Lakes, Glacier, Denali, and Kenai Fjords National Parks. Recent acquisitions and renovations, like the Glacier Skywalk, Banff Gondola, and FlyOver Vancouver have higher margins than the company average, and generate high returns on capital (15%+); meanwhile, the company’s hotel and lodging operations continue to steadily increase both occupancy and revenue per available room (i.e., “RevPAR”).
PURSUIT SERVICES OVERVIEW
- Can earn sustained high returns on capital because gov’t likely limits # of businesses that can operate in and around national parks.
- High-margin cross-selling opportunities (e.g., food and beverage, lodging, tours, tickets to owned attractions).
- Accounts for 13% of VVI’s revenue, yet generates 43% of profits because of 30% EBITDA margins (vs. 5% for GES).
- Attractions business is the most valuable in the segment (from profitability standpoint).
- Hotels and lodges generate steady revenue, and RevPar and occupancy continue to increase.
- 10% revenue CAGR since 2013
- CapEx = 7% of revenue
Pursuit is composed of the following tourism assets:
- Brewster Travel Canada: tourism provider in the Canadian Rockies with two lodging properties in Banff National Park, one lodging property in Jasper National Park, five recreational attractions, food and beverage services, retail operations, sightseeing and transportation services.
- Alaska Collection: leading travel and tourism provider in Alaska with two lodging properties and a sightseeing excursion in Denali National Park, Alaska’s top rated wildlife and glacier cruise, and two lodging properties located near Kenai Fjords National Park.
- Glacier Park, Inc: operator of seven lodging properties, twelve retail shops, and eleven dining outlets in and around Glacier National Park—which is one of the most visited national parks in the US—and Waterton Lakes National Park, with a leading share of rooms in that market. Glacier Park Inc. is an 80% owned subsidiary.
- FlyOver Canada: FlyOver Canada is a virtual flight ride experience located in Vancouver that combines motion seating, media, and visual effects to simulate the experience of flying over Canada.
Bottom-line: While each individual property/asset has different margins, growth rates, and returns on capital, the overall segment trends are clear: revenue is growing 7% - 10%, margins are improving, returns on capital are increasing, and the company continues to generate more revenue per customer/visitor as evidenced by increasing RevPar, higher ticket prices, and incremental food and beverage sales. This is a very good business, with limited competitors, and opportunities to reinvest capital at good returns. Management has communicated they intend to spin out Pursuit once revenue is $250m (est. 2021).
VVI’s TTM revenue is $1.3b, and they earned $75.3m—or $3.69/share (note that Q4 EPS will likely be negative due to seasonality). Gross margin is 7.5%, operating margin is 7%, and net margin is 5.5%. Primary expenses as a % of sales are:
VVI’s free cash flow slightly lags net income, largely due to a recent increase in renovating/remodeling existing properties, and repairing a hotel destroyed by fire. So far, results on the “remodels” (e.g., Banff Gondola) have been promising, and if VVI continues to redevelop existing assets at high rates of return, FCF generation could accelerate.
- $100m CFO
- $75m cash used in investing activities
- $56m of which is CapEx
- $44m FCF
- $20m cash used in financing activities (mostly paying down debt and paying out dividends)
BALANCE SHEET, CAPITAL INTENSITY, AND SHAREHOLDER RETURN POLICY
VVI’s balance sheet is solid, if not stellar. The company has taken on debt to fund acquisitions, hitting a peak of $250m in Q2 2017. Total debt now stands at $185m.
- $53m cash and equivalents
- $185m debt/revolving credit facility
- Debt to equity: .40
VVI’s business is moderately capital and asset light (15% ROE & 30% RNOA), and earnings have grown far in excess of the growth in book value.
- Since 2009, equity has increased 15%—from $395m to $454m—while earnings and FCF have increased 730% and 65%, respectively.
- In 2017, VVI will spend $55m on CapEx, which is approximately 55% of OCF and 75% of earnings.
- Operations generated $100m in cash, which should be sufficient to cover all financing and operational needs in the foreseeable future.
BUYBACKS & DIVIDENDS
VVI pays out about 11% of net income in the form of dividends and buybacks.
- In 2017, VVI paid out $8m in dividends and $1m in buybacks.
- Viad has purchased 1,000 shares under the current share repurchase program, and has 440k shares authorized/outstanding.
MANAGEMENT & GOVERNANCE
- Insiders own 5% of the company
- Average Board tenure reduced from 9 to 6 years (since 2012)
- Eliminated Poison Pill (Feb 2013)
- Separated Chairman and CEO roles
- New CEO, Steve Moster (Dec 2014)
- Added 3 independent Board members w/ industry expertise
- Comp goals based on EBITDA, ROIC and TSR
- Holding requirements for vested restricted stock
BOARD OF DIRECTORS
- Edward E. Mace (President & CEO, Silverwest Hotel & Mace Pacific Holding Co)
- Joshua E. Schechter (Chairman of the Board, support.com)
- Richard H. Dozer (Chairman of the Board, Viad; Former President, Arizona Diamondbacks;
- COO Phoenix Suns)
- Steve Moster (President and CEO, Viad)
- Dr. Isabella Cunningham (Chair of Advertising @ Univ of Texas at Austin)
- Andrew Benett (Chief Commercial Officer of Bloomberg Media)
- Robert Munzenrider (Former President, AutoGlass)
- CEO & President: Steven W. Moster
- CFO: Ellen M. Ingersoll
- President of Pursuit: David W. Barry
- General Counsel & Secretary: Deborah J. DePaoli
- Chief Accounting Officer: Leslie S. Striedel
RATIOS & MARGINS
Nearly all ratios and margins are moving in the right direction (up, and to the right). As time goes on, Viad seems to get more efficient and more profitable.
Management is fond of touting “Segment Operating Income”, which is income (loss) from discontinued operations, corporate activities, interest expense/income, taxes, restructuring charges, and impairments.
Adjusted EBITDA margins—which are defined as “Segment Operating Income” before acquisition integration costs and non-cash depreciation and amortization—come in 7% - 10% higher than GAAP operating margins.
At first glance, Viad looks to be properly valued at about 17x TTM earnings. But because of the company’s consistent earnings; light capital requirements; ongoing margin expansion; and opportunities to deploy additional capital at high rates of return; it’s more likely than not that Viad is somewhat undervalued.
Assuming 5% consolidated revenue growth, slight margin expansion, and a 15x-18x multiple yields $75 - $90/share.
WHAT’S TO LIKE
- Operating margins have expanded 80bps per year since 2010
- Few competitors / high barriers to entry for both Pursuit and GES
- Mid-teens ROE (and accelerating)
- Opportunities to reinvest capital at high rates of return
- Earnings have grown faster than equity
- Strong cash flow
- Balance sheet remains relatively clean
- Trading at 11x 2020 earnings
WHAT’S NOT TO LIKE
- Management’s preference for adjusted EBITDA #s (and that comp is based on them)
- Light insider ownership
- Pesky, recurring “one-off” restructuring and impairment charges
- Moderate levels of debt
- Both tourism and corporate events highly sensitive to economic downturns
If Viad doesn’t grow and margins stay put, it’s probably fairly valued (warts and all); however, if the company can instead maintain 5% - 7% growth and continue to expand margins—trends which are already well underway—then investors can get a very good business at a 25% - 50% discount.
RESOURCES & ADDITIONAL RESEARCH
- Valuation Model
- Annual Reports
- Viad Investor Relations
- Value Investors Club
- Artko Capital: 2016 Q1 Letter
- Artko Capital: Two Great Companies For the Price of One - 11/8/2017
- Coho Capital 2015: Q2 Letter
- Compared to the first nine months of 2016, consolidated revenue grew 8.6%, adjusted segment EBITDA grew $25.1m, and and adjusted segment EBITDA margins improved by 140bps to 14%.
- 7.6% YoY revenue growth (first 9 months)
- 90 bps improvement in operating margin (first 9 months)
- Pursuit Services
- 9.8% YoY revenue growth (first 9 months)
- 570 bps improvement in adjusted segment EBITDA margins (first 9 months)
- 3Q results exceeded the high end of guidance
- Significant improvements in KPIs (e.g., same store passengers @ attractions increased 4.3%, revenue per passenger increased 20%, RevPAR increased 4.2%)
- Strong results from Banff Gondola (revenue increased 42% on passenger increase of 3.2%) due to significant upgrades. Also capturing more revenue per passenger from ticket sales, dining and retail
- Packaged tours revenue declined about $4m, reflecting downsizing of lower margin business.
- ON Services AV production performed below expectations due to lower than anticipated short-term bookings. Additionally, cross-selling and insourcing opportunities taking longer to develop than originally anticipated.
- 3Q Hospitality revenue down about $500k due to the fire-related closure of the Mount Royal Hotel, which generated revenue of about $1.5 million during the 2016 second quarter.
- Recognized business interruption gain of $1.1 million which represents lost profits from the Mount Royal Hotel during the quarter.
2017 PREDICTIONS FOR NEXT YEAR
- 6% - 8% revenue increase (vs. prior guidance of 5%)
- Adjusted segment EBITDA: $153m - $155m (up $9m from prior guidance) and includes about $3m related to the Mount Royal Hotel that was not previously considered.
- CFO: $115m - $125m
- CAPEX: $62m - $66m (includes $18m related to the reconstruction of the Mount Royal Hotel).
- Higher corporate expenses due to the impact of stock appreciation on performance based incentives
- Increase in tax rate (from 32%)
- Almost through permitting process for the development of a new RV Park in Glacier National Park. It will have 100 full-sized RV slips and 20 guest cabins. Partial opening in 2018 and fully operational in 2019.
- The RV Park market is fragmented in the region w/ limited supply. VVI’s site is ideally located at the park entrance, and should have lucrative economics and high returns on investment.
- Total revenue increased $116m (10.6%), due to the incremental revenue of $56m from acquisitions completed in 2016 (CATC, ON Services, and Maligne Lake Tours), $52m from positive show rotation, and continued underlying growth in both GES and Pursuit. Offset in part by an unfavorable foreign exchange impact of $24m.
- Net income increased $15.7m (59%), primarily due to increased segment operating income, offset by higher income taxes.
Total segment operating income increased $31.3 million (57%), due to high flow-through on revenue incase.
- $1b revenue ($74m increase / 8% YoY)
- $50m operating income ($26m increase / 88% YoY)
- 200bps operating margin improvement
- In August, expanded presence in the $2 billion U.S. audio-visual event production market with the acquisition of ON Services. Strategically important market due to size and margin profile. Strong business that provides cross-selling opportunities as well as in-sourcing benefits.
- Benefited from positive show rotation, same-show growth, new business wins and focus on higher-margin areas (e.g., AV services, event technologies and corporate events)
- Pursuit Services
- $153m revenue ($41m increase / 37% YoY)
- $35m operating income ($8m increase / 29% YoY)
- -150bps decline in operating margin
- Acquired Maligne Lake Tours, CATC, and FlyOver Canada
- 10.3% increase in passenger count
- 11.3% increase in RevPAR
- 71.1% occupancy (vs 67.4% prior year)
- Banff Gondola closed for much of the year for renovations
- Fire at Mount Royal Hotel, closing it indefinitely (no injuries)
2016 PREDICTIONS FOR NEXT YEAR
- 5% consolidated revenue growth
- $90m - $94m Adjust Segment Operating Income (11% - 14% growth)
- $119m - $126m Segment EBITDA
- $110m - $120m CFO
- $40m - $48m CapEx
- 6% - 7% increase in revenue
- $7.5m - $9m increase in adjusted segment EBITDA
- Acquisition of ON Services expected to provide incremental revenue of $45m - $48m and incremental Adjusted Segment EBITDA of $11m - $13m
- 12% - 14% increase in revenue
- $14.5m - $16m increase in adjusted EBITDA
- FlyOver Canada expected to contribute incremental revenue of $9m - $10m with Adjusted
- Segment EBITDA of $5m - $5.5m.
- Revenue to be negatively impacted by $13m as VVI downsizes low-margin Brewster Travel Canada’s package tours line of business.
- Revenue growth of $7m - $9m from the newly renovated Banff Gondola .