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Sustainable Investing

Vail Resorts and Its Human Capital Management Headache

Personnel problems led to crowded mountains, but Ron Baron remains a fan.

As a long-term holder of Vail Resorts MTN, celebrated investor Ron Baron rarely had to think about sustainability issues when it came to discussions with the ski resort operator. After all, Vail had a plan to decisively reduce emissions to net zero by 2030 and is using renewable electricity widely. Yet this year, Vail has been plagued by a new sustainability challenge, in the form of widespread staffing problems, raising the ire of skiers and snowboarders. It’s something Baron intends to speak to Vail executives about.

The pandemic has been tough on ski operators, not least on Vail, which operates popular resorts like Breckenridge, Vail Mountain, Park City, and Whistler-BlackComb, some of the 37 properties that make it the world’s largest ski resort operator. Late in calendar 2021, Vail’s revenues from lift tickets, ski school, and dining revenues were struggling. And staffing challenges mean that parts of popular resorts remain closed. At a visit to Park City early this year, analyst Tyler Batory, who covers Vail stock for Janney, said it “felt crowded on the mountain. It all ties back to labor.”

“We believe that the significant acceleration of COVID-19 cases associated with the omicron variant has negatively impacted our results along with the broader travel sector as we expect certain guests reconsidered travel plans and were impacted by related flight cancellations," Vail CEO Kirsten Lynch said in a statement. As a result, from its Nov. 5 high, Vail stock is down 22% to a recent $290, compared with a 4.8% decline for the Morningstar U.S. Large-Mid Index over the same period. Morningstar equity research doesn’t actively cover Vail shares.

Sustainability issues go beyond protecting the environment. With millions of people leaving their jobs in what’s being called the “Great Resignation,” add employee retention to a company’s most important sustainability concerns. Human capital management looks at employees as a form of capital, providing economic value to the company. Organizations that invest in employees, the theory goes, can in turn grow that capital over the long haul. That makes employee retention one of the environmental, social, and governance factors that dominate the discussion of sustainability. “I’m absolutely looking closely at it,” says Batory. “It’s a potential issue to think about it long term.”

A look at Vail underscores why. Vail’s wages are middling, analysts say, even though it recently instituted a $15 minimum wage at popular resorts and added benefits for sick employees. Jeff Stantial, an analyst at Stifel, notes that many of Vail’s peers “are already at $17 or $18 an hour.” Add to that challenge is the fact living costs are high in resort towns. Consider this comment from Glassdoor, the website where current and former employees anonymously review companies: “Really low pay considering how expensive food is in Vail” is a common complaint.

Meanwhile, Vail recently averted a strike by the Park Mountain ski patrol, which provides lift evacuations and avalanche control, by agreeing to an hourly wage of $19, which the ski patrol union said gives workers "wage parity with Colorado resorts." Vail had originally offered $15.

And even though the resort operator recently added a $2 per hour bonus to be paid out to workers at the end of the season, “I expect there is still pressure for Vail to raise wages durably,” Stantial says.

The personnel challenges have been exacerbated by the coronavirus pandemic. At Stevens Pass resort in Washington, long lines owing to a lack of lift operators have been normal even as big sections of the mountain remain closed. Vail replaced its general manager with a new one this year. Meanwhile, skiiers and snowboarders signed a petition asking Vail to open the mountain.

Vail generally has a good reputation on sustainability issues. For example, it has a plan to achieve net zero emissions by 2030, and it uses renewable electricity for 85% of its needs at 34 North American resorts. It also donates widely to local organizations that support food and housing assistance and other programs. “Vail Resorts achieved industry-leading sustainability progress, expanded access to the outdoors for those who may not have otherwise had the opportunity, and supported our employees through unexpected challenges and continued education,” CEO Lynch recently said.

Baron doesn’t regard himself as the kind of investor who meddles with management. He’s quick to point out that he has been a long-term Vail shareholder. “I’ve argued to them for a long time that they should be paying more,” he says. “I have some other ideas to push them to tie people in more” to the company over the long term, “and get them to earn more and have their interests aligned” with those of the company and shareholders. For example, Baron notes that in the past Vail has given employees shares.

Baron believes Vail will fix its personnel woes: “I’m sure Vail will make progress.” In fact, he can see a path to Vail growing cash flow (earnings before interest, taxes, depreciation and amortization) “in the double digits each year, to $1.5 billion in the next five to 10 years. For the current year ending July, Vail expects EBITDA of between $785 million and $835 million, versus $540 million in fiscal 2021 and $499 million the previous year. In fiscal 2019, before the pandemic, it posted EBITDA of $702 million. That, Baron says optimistically, could lead to a doubling of the shares.

Sustainable Indexes Leaped Higher in 2021

Companies that scored the strongest on ESG metrics saw some of the highest returns in 2021 with help from stocks such as Nvidia NVDA, Microsoft MSFT, and Tesla TSLA.

The Morningstar U.S. Sustainability Leaders Index--representing the 50 U.S. companies with the best ESG scores as measured by Sustainalytics (a division of Morningstar)--returned 33.3% for the year, beating the broader U.S. market by more than 8%.

It wasn’t just companies ranked the very highest in ESG scoring that outperformed. Morningstar’s broadest basket of sustainable companies, measured by the 373-stock Morningstar U.S. Sustainability Index, returned 29.1% in 2021, 3 percentage points better than the overall U.S. stock market.

That ESG strategies outperformed in 2021 is notable given the best-performing stocks across the market last year by far were oil and gas focused energy companies--names that don’t make it past ESG screens. Instead, the companies that are the very strongest from an ESG perspective tend to be large- or mega-cap, high-growth, technology companies. In 2021, these areas of the market did especially well--well enough to power past the gains in energy stocks.

“This year, companies with better ESG risk assessments outperformed their peers with the weakest ESG assessments,” says Sara Mahaffy, ESG strategist at RBC Capital Markets.

The outperformance of sustainability strategies was widespread in 2021, based on Morningstar’s data. Within the Morningstar Sustainability Index family (indexes designed to target stocks with low ESG risk ratings), 14 of 21 indexes outperformed over the past year, compared with 18 of 21 outperformers in 2020. Nine out of 10 of the Morningstar Low Carbon Risk indexes beat their benchmarks in 2021.

And in the fourth quarter, the Morningstar Sustainability Dividend Yield Focus Index, a collection of companies with both healthy income streams and strong ESG scores, posted the highest return, modestly outperforming the Morningstar U.S. Sustainability Leaders Index.

With the numbers posted in 2021, sustainable investing strategies continue their run of beating conventional market benchmarks over longer periods. Six out of the 10 U.S. sustainability indexes beat their benchmarks over the trailing three-year performance period, as did seven over the five-year period.

As Jon Hale, head of sustainability research for the Americas at Morningstar, wrote, “Last year's performance adds to the evidence that investments that use [ESG] ratings and metrics to select securities and structure portfolios can deliver competitive returns.

So why did they outperform? Individual stock weights were a big part of the story.

"When ESG funds exclude less-sustainable companies, they tend to pile up positions in mega-caps that earn better ESG metrics,” meaning that they have a disproportionately higher representation than the conventional index, says Lan Anh Tran, associate manager research analyst for passive strategies at Morningstar. “Companies like Microsoft and Tesla that pass ESG screens end up carrying nearly 2 times their broader market weight. That has implications on performance.” For example, Microsoft, which gained 52% last year, has a 3 times greater weight in the Morningstar U.S. Sustainability Leaders Index than in the broader market.

These individual stock weights help offset some market sector headwinds in 2021, most notably the lack of energy stocks, which produced their strongest returns in more than 10 years. Still, the energy sector is just a small part of the overall market, making up less than 3% of the Morningstar U.S. Market Index.

To be sure, as stocks slid so far this year, sustainable indexes have fallen by more. The wide Morningstar U.S. Sustainability index is down 6.5%, versus 5.5% for the Morningstar U.S. market index as of Jan. 19. That could change if the market comes roaring back.

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