The travel industry is facing headwinds as signs of a recession loom. Viad Corp (VVI) is a leisure travel company that has struggled in past recessions but has been able to weather the storm and come out the other side. However, Viad is reliant on discretionary consumer spending, and any drawback could spook creditors and rating agencies. In today’s FA Alpha Daily, we’ll take a look at Viad from the Uniform Accounting perspective and evaluate the company’s true credit risk profile.
The travel industry boomed following the lifting of COVID-19 restrictions.
The global travel sector grew nearly 25% year over year in 2021, and an additional 22% in 2022. People were ready for their lives to recover and so was the economy.
However, as represented by this heavy demand upswing, the travel industry is cyclical.
It’s no secret we’re expecting another U.S. recession sometime soon. We’ve been calling for the recession to start late this year or early next year since late 2022.
This could have a significant impact on the travel industry, and the post-COVID momentum could die out.
For that reason, we get why rating agencies and creditors might be getting worried about certain industries like leisure travel.
Viad Corp (VVI) is a great example of this.
The company owns and operates a portfolio of destination resorts, theme parks, museums, and hotels. They also create interactive experiences for trade shows, live entertainment, and corporate events.
There is no doubt Viad is cyclical. Its Uniform return on assets (“ROA”) fell to near zero in 2010, and it turned massively negative in 2020.
Viad’s reliance on its travel segment leaves it quite vulnerable to any declines in discretionary spending. Its success depends on consistent momentum in the travel industry, and credit agencies do not foresee this continuing.
That is why the S&P has rated the company “B”. This rating implies a massive chance of default, around 25% over the next few years. It also places the company among the risky high-yield basket.
While we do share some concerns with the ratings agencies, we need to look at the company’s credit situation to evaluate their justification.
We can figure out if there is a real risk for this company by leveraging the Credit Cash Flow Prime (“CCFP”) to understand how the company’s obligations match against its cash and cash flows.
In the chart below, the stacked bars represent the firm’s obligations each year for the next five years. These obligations are then compared to the firm’s cash flow (blue line) as well as the cash on hand available at the beginning of each period (blue dots) and available cash and undrawn revolver (blue triangles).
The CCFP chart shows that Viad’s cash flows are more than enough to serve all its obligations going forward.
The chart shows that Viad is in good financial health. The company’s robust cash flows should allow the company to meet its obligations over the next five years with ease.
Additionally, the spread between its cash flows and obligations provides the company with some flexibility given its dependence on loans to stimulate growth.
Right now, we have no reason to worry. Viad has no major debt coming due soon, and it should have the cash to get it through any tough times. Plus, we don’t expect this to be an awful recession, so its returns might weaken, but not by much.
All these factors point out that the company is not facing a significant chance of default as rating agencies suggest.
That is why we are giving an “IG4” rating to this company. This rating ensures that Viad is placed within the safer investment-grade basket and implies a chance of default of around 2%.
It is our goal to bring forward the real creditworthiness of companies, built on the back of better Uniform Accounting.
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SUMMARY and Viad Corp (VVI:USA) Tearsheet
As the Uniform Accounting tearsheet for Viad Corp (VVI:USA) highlights, the Uniform P/E trades at 25.2x, which is above the global corporate average of 18.4x and its historical P/E of 15.6x.
High P/Es require high EPS growth to sustain them. In the case of Viad, the company has recently shown a 123% Uniform EPS decline.
Wall Street analysts provide stock and valuation recommendations, that in general, provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.
We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Viad’s Wall Street analyst-driven forecast is for a -7% and 146% EPS growth in 2023 and 2024, respectively.
Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Viad’s $29 stock price. These are often referred to as market-embedded expectations.
Furthermore, the company’s earning power in 2022 was in line with the long-run corporate average. Moreover, cash flows and cash on hand are 2x its total obligations—including debt maturities and capex maintenance. The company also has an intrinsic credit risk that is 510bps above the risk-free rate.
Overall, this signals a high credit risk.
Lastly, Viad’s Uniform earnings growth is in line with its peer averages and is trading above its average peer valuations.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research
This analysis of Viad Corp’s (VVI) credit outlook is the same type of analysis that powers our macro research detailed in the member-exclusive FA Alpha Pulse.