Executive Summary: Go long Viad Corp. The current multiple of 19X 2018E earnings is fair for current earnings, but management has been very proficient at growing earnings and should continue to do so. The earnings growth potential is significant here, through organic growth and accretive M&A.
Key points to the long thesis:
1) Viad Corp operates in two segments: Global Events and Travel & Recreation. The Global Events business is low margin but they are market leaders. The Travel business is high margin but cyclical.
2) The management team is solid and very shareholder focused. They have done well for shareholders in the past. High IRRs on historical acquisitions, high quality product offerings in both segments which has led to very good operating metrics and market share. There was even a special dividend to shareholders.
3) Both Events and Travel segments offer growth in both segments. On Events, they believe they can get greater share of wallet from customers due to their enhanced Audio/Visual offerings from their recent ON acquisition, as well as a new U.S. product introduction (a SAAS platform for event registration and analytics). On Travel & Recreation, which is their 50%+ EBITDA business but with cyclicality of course, on using free cash flow to purchase more experiential assets akin to their current portfolio of attractions. Their T&R business reminds me a lot of theme parks, with a captive audience and ability to upsell higher margin food & beverage products.
4) Operating metrics are humming. You're paying 19X 2018E EPS, which is likely going to be flat vs. 2017E due to a drop off in non-annual events, but longer term, I think the business has good growth prospects. Cash flow is strong, CAPEX is low relative to EBITDA (EBITDA less CAPEX is around $60MM), there's a dividend and a share repurchase program in place. Net debt is around $143MM.
5) As the two segments grow, the company may decide to break up the company into two, resulting in a valuation boost from the current conglomerate discount.
Detailed analysis
Here's a quick description of the company:
"Viad Corp is an international experiential services company. The Company has operations in the United States, Canada, the United Kingdom, continental Europe and the United Arab Emirates. The Company conducts its operations through three business segments: the Marketing & Events U.S. Segment (U.S. Segment), the Marketing & Events International Segment (the International Segment) (collectively, the Marketing & Events Group), and the Travel & Recreation Group. The Marketing & Events Group, which includes the operations of Global Experience Specialists, Inc. (NYSE:GES), is a global provider for live events. The Travel & Recreation Group provides experiential travel services in iconic locations. The Marketing & Events Group, through GES, produces exhibitions, congresses and conferences, corporate events, consumer events, exhibits and entertainment experiences. The Travel & Recreation Group has a collection of hotels, lodges, recreational attractions and transportation services."
There are two segments. The GES business is not a high margin business, but it is growing leaps and bounds, organically and they are in acquisition mode. The Travel business has better margins but the organic growth is more muted (but still positive at 10%+) and they are making acquisitions.
Here are the headlines from the Q3 2016 earnings release:
"Revenue of $382.5 million increased 49.4% ($126.5 million) year-over-year or 40.4% ($103.3 million) on an organic basis (which excludes the impact of acquisitions and exchange rate variances).
- The organic revenue growth reflects positive show rotation at GES and strong underlying performance at both business groups.
- The acquisitions of Maligne Lake Tours (January 2016), CATC (March 2016) and ON Services (August 2016) contributed incremental revenue of $31.2 million.
- Exchange rate variances had an unfavorable impact on revenue of $8.0 million.
- Adjusted segment operating income, adjusted segment EBITDA and income before other items improved compared to the prior year quarter primarily due to high flow through on the increase in revenue."
Now the news is definitely positive here. Let's dig a little deeper into the segment results:
"GES revenue of $287.0 million increased 52.0% ($98.1 million) year-over-year. On an organic basis, which excludes the impact of acquisitions and exchange rate variances, revenue increased 52.0% ($98.3 million).
- U.S. organic revenue increased 51.5% ($76.4 million), primarily due to positive show rotation of approximately $67 million, new business wins and base same-show revenue growth of 3.0%.
- International organic revenue increased 53.5% ($24.0 million) from the prior year quarter, primarily due to positive show rotation of approximately $18 million, new business wins and same show growth.
- GES adjusted segment operating income of $15.3 million* increased $29.8 million year-over-year, or $29.6 million on an organic basis.
- U.S. organic adjusted segment operating income of $14.1 million* increased $23.0 million primarily due to higher revenue and strong operating leverage.
- International organic adjusted segment operating income of $0.9 million* increased $6.5 million primarily due to higher revenue and strong operating leverage.
- The acquisition of ON Services contributed revenue of $7.8 million, adjusted segment operating income of $0.5 million* and adjusted segment EBITDA of $1.7 million* during the 2016 third quarter, in line with prior guidance."
Let's look at the Travel segment.
"T&R revenue of $97.4 million increased $30.3 million (45.2%) year-over-year. On an organic basis, which excludes the impact of acquisitions and exchange rate variances, revenue increased $7.0 million (10.4%) primarily due to higher passenger volumes at the attractions and higher RevPAR across the hospitality portfolio.
- T&R adjusted segment operating income of $44.2 million* increased $14.8 million. On an organic basis, operating income increased $4.6 million (15.5%) primarily due to high-margin revenue growth from attractions and hospitality assets.
- The acquisitions of Maligne Lake Tours and CATC contributed revenue of $23.4 million, adjusted segment operating income of $10.3 million* and adjusted segment EBITDA of $12.7 million* during the quarter, exceeding prior guidance."
| Q3 2016 | Q3 2015 | y-o-y Change | |
| $ in millions | |||
| Revenue | $ 97.4 | $ 67.1 | 45.2% |
| Organic Revenue* | 74.0 | 67.1 | 10.4% |
| Adjusted Segment Operating Income* | $ 44.2 | $ 29.4 | 50.5% |
| Adjusted Segment Operating Margin* | 45.4% | 43.8% | 160 bps |
| Adjusted Segment EBITDA* | $ 49.3 | $ 31.9 | 54.3% |
| Adjusted Segment EBITDA Margin* | 50.6% | 47.6% | 300 bps |
| Key Performance Indicators: | |||
| Same-Store RevPAR(1) | $179 | $161 | 11.2% |
| Same-Store Room Nights Available(1) | 89,193 | 88,664 | 0.6% |
| Same-Store Passengers(2) | 941,066 | 822,480 | 14.4% |
| Same-Store Revenue per Passenger(2) | $31 | $30 | 3.3% |
There's a couple of neat things happening here. First, Same-Store RevPAR is up big time at 11%, while Same-Store Room Nights Available are flat. Prices up, supply constant. Me likes. Same-Store
Passengers are up big time, as is Same Store Revenue per Passenger.
Here is how they define each term:
| (1) | Same-store RevPAR is calculated as total rooms revenue divided by the total number of room nights available for all comparable T&R properties during the periods presented, expressed on a constant currency basis. Comparable properties are defined as those owned by Viad for the entirety of both periods. Accordingly, the third quarter comparisons exclude CATC. |
| (2) | Same-store revenue per passenger is calculated as total attractions revenue divided by the total number of passengers for all comparable T&R attractions, expressed on a constant currency basis. Comparable attractions are defined as those owned by Viad for the entirety of both periods. Accordingly, the third quarter comparisons exclude Maligne Lake Tours and CATC. Same-store passengers and revenue per passenger were affected by the partial closure of the Banff Gondola during the 2016 third quarter; although its lift operations were re-opened on May 1, the dining and retail services previously offered at its upper terminal remained closed for renovations into the latter part of the third quarter. |
Now on to Capital Structure (from the release):
"Cash Flow / Capital Structure
- Cash flow from operations was $61.0 million for the 2016 third quarter.
- Capital expenditures for the quarter totaled $12.0 million, comprised of $6.4 million for GES and $5.5 million for T&R.
- Return of capital totaled $2.0 million for the quarter (which represented quarterly dividends of $0.10 per share). Viad had 440,540 shares remaining under its current repurchase authorization at September 30, 2016.
- Debt proceeds (net) totaled $63.1 million for the quarter, reflecting the cash payment of $87 million for the acquisition of ON Services.
- Cash and cash equivalents were $52.7 million, debt was $196.0 million and the debt-to-capital ratio was 34.0% at September 30, 2016."
This looks like a good business to own. There's a need to better understand size of the industry, market fragmentation, management philosophy around acquisitions etc. But based on the financials, it certainly seems like the business is humming and you want to be part of the success.
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