Intrawest on a Smooth Ride

Shares have been on a tear amid buyout speculation, and operating fundamentals are strong as well.
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Updated from 10:08 a.m. EDT



shares have been on a tear since early March when an activist hedge fund pressured the ski-resort operator for a company sale to unlock real estate value.

While the stock is definitely a merger play, some long-term investors say it is also worth owning for its strong operating results.

The Canadian company, which is one of North America's largest ski resort operators and a residential real estate developer, announced in early February that it hired Goldman Sachs as an investment banker and was "exploring strategic alternatives" -- language that usually implies a sale of assets or the entire company.

For its part, activist hedge fund Pirate Capital, which has been busily buying shares lately and has amassed a 14.6% stake in the company, urged Intrawest's board of directors in early March to sell the entire company. Pirate said the fair valuation of Intrawest is $45 or more per share.

Intrawest shares recently were trading at $36.69, up 9 cents. On Wednesday, the company reported fiscal third-quarter earnings that beat analyst estimates. Intrawest's earnings fell to $61 million, or $1.23 a share, from $62.7 million, $1.31 a share, a year earlier. Analysts expected a profit of $1.03 a share. A change in depreciation rates significantly boosted depreciation and amortization expenses, which dragged down net income.

The company's earnings before interest, taxes, depreciation and amortization increased 25% to $136.5 million, mostly due to the closing of the first phase of the sale of a majority interest at Mammoth Mountain in California. Operating income from the company's resort and travel operations segment remained flat.

Intrawest gave no update on the sales process in its earnings release nor on its conference call.

Intrawest owns some of the best-known ski resorts in North America -- including Whistler Blackcomb in Canada and Stratton in Vermont. Surrounding many of those mountains are large tracts of residential real estate that the company develops. The firm also owns resorts and real estate opportunities in warmer locations such as Hawaii and Florida. Its land holdings consist of about 18,000 housing units that the company plans to develop over the next 15 years.

For years, Intrawest has been a sleepy stock owned by wise real estate value hunters such as Carl Tash at Cliffwood Partners, who began buying the stock around $9 four years ago because he felt the company's assets were undervalued. His firm now owns 2.5% of the company.

"Will the public markets ever value this thing fairly?" Tash says, adding that he still thinks the stock is cheap, even as it has surged 26% since the announcement of a possible sale.

Intrawest's assets are not only undervalued, but "to a degree, irreplaceable," says Jerome V. Bruni, whose firm, J.V. Bruni & Co., has owned Intrawest stock for several years.

"Those properties are hard to come by. They make attractive second residences or retirement residences for people in age groups that are growing very rapidly right now," Bruni says, referring to the growing number of baby boomers reaching retirement.

The market expects many buyers to be interested in Intrawest. Hotel bigwig and Starwood Capital Group CEO Barry Sternlicht recently told


that his firm was looking at buying Intrawest. Last year, Intrawest sold Starwood Capital an 85% interest in Mammoth Mountain, the California ski resort. Blackstone Real Estate Advisors, the private equity fund that has been busily buying up lodging companies over the past year, also would be a likely suitor for Intrawest's assets.

"A sale of the whole company is the most likely option given the amount of private equity money that is currently chasing real estate and any asset that is related to real estate," says JMP Securities analyst William Marks, who rates Intrawest a strong buy. His price target of $41 represents what he thinks is the low end of what any buyer will pay.

Tash believes that some sort of deal -- whether asset sales or a privatization -- is likely. But even if a deal isn't done, Tash says he's still comfortable owning the stock because he believes the company has a strong operating future.

In short, Intrawest has a much different story from that of

Mills Corp.


, another real estate company that is exploring a sale. The mall developer is facing a wave of shareholder lawsuits and an


investigation related to its financial restatements.

With Intrawest, the stock is a merger play that could still yield returns if a deal isn't done because of the company's strong fundamentals. Investors in Mills, on the other hand, could be in for a shock if they're left owners of the beleaguered company and there is no sale.

Besides the value from potential Intrawest land sales, there could be some hidden earnings power at

Whistler Mountain, which is home to skiing events at the 2010 Olympics in Vancouver.

"In addition to significant earnings potential that year, we believe the event is likely to have a positive impact on the resort in the years leading up to and following the Olympics (potentially including major expansion and/or redevelopment afterwards), but sense the scope of this has yet to be appreciated," Deutsche Bank analyst Chris Woronka, who rates the firm a buy with a $42 price target, wrote in a recent report.