Travel + leisure (NYSE: TNL) has been quietly rebuilding its vacation ownership business in the wake of the COVID pandemic. The company spun off from global hotelier giant Wyndham, leaving many questioning the company’s future, with some even going so far as to suggest that The spin-out would signal the end of the timeshare industry as we knew it. Things have gone quite differently for the company. Under the leadership of industry veteran Michael Brown, the company has managed to weather major structural changes and a global health crisis that disproportionately affected the hospitality industry. As if that weren’t enough, the company is now facing the prospect of a major global slowdown as central banks struggle to address rampant inflation. Despite this, the company looks to be firing on all cylinders and is heading into a crucial next quarter that will provide investors with insight into the company’s sustainability as we look to embark on the next business cycle.
Today we’re going to take a look at Travel + Leisure and discuss what investors can expect from the company going forward (I’ve covered the company in the past, for a more detailed company profile, check out this article).
After the conclusion, I must confess that I had my fair share of reservations if the company could maintain its strong sales volume without making concessions on unit price, which would, of course, affect gross margins. So far, that concern has proven unfounded, as the company is posting gross profit margins north of 60%.
This is an amazing number. Remember, this is not a software-as-a-service business. Instead, the company is selling vacation ownership interests in its existing portfolio to customers likely to pay marketing costs to buy them. These marketing costs are mainly manifested in the form of gifts that the company offers to entice people to attend sales presentations. Timeshares are obviously a tough sell and it often takes multiple visits to finally convince a customer to buy. This is why investors tend to pay close attention to gross margin and marketing cost figures, as it provides great insight into the overall appeal of the product. Right now, Travel + Leisure is clearly knocking it out of the park.
In its last earnings call, the company reported an impressive adjusted EBITDA of $230 million, which was good for EPS of 1.27 cents. They also managed to produce a record volume per guest of $3489. Volume per guest is actually the amount of money the company makes per tour it takes. The interesting thing about this is that for the second quarter, more than 65% of new owner sales were to Gen-Xers and millennials. The importance of this cannot be overstated when you consider the background of the timeshare industry. Airbnb ( ABNB ) and other alternative vacation options were being touted as timeshare killers. The general expectation was that as these services became more popular, the timeshare industry would eventually die out. The company that manages to create profitable relationships with the younger owners is so important. It’s also worth noting that new owner sales typically have a lower VPG than existing owner sales, and that new owners tend to come back and buy additional ownership down the line. The company also mentioned that nearly 80% of its owner base travels debt-free. This means their vacation ownership is paid for in full and their only commitments are annual maintenance fees. It would be fair to say that the company is currently in a good place with its ownership mix and is showing signs of further development in the right direction. But with the economic slowdown on the horizon, there are some concerns about the vulnerability of the business model to failures.
Timeshares are, first and foremost, a luxury purchase. Vacations are often seen as optional endeavors, even though they should probably take higher priority. Timeshare companies help their clients go on vacation by getting them to commit to buying an ownership interest in a property or portfolio, allowing them to lock in the price of their vacation for the most part, except for adjustments. random annual maintenance fees. Because timeshares tend to be expensive, big-ticket purchases, customers tend to finance the purchase at least partially with debt. This practice is normally good and the company does an excellent job of vetting its customers to make sure they can handle the financial commitments that come along with the purchase. But if there were a broad economic slowdown as a result of the Federal Reserve tightening to tackle inflation, for example, the consequences would not only hurt consumer confidence, which would be a headwind to new purchases, but it could also result in more than normal delinquencies in vacation finance property products, which can become quite problematic for these types of companies. The good news is that these companies are getting better at working with customers during tough times to keep their owners happy and prevent company-wide damage.
First Rating and Comment
Despite these concerns, Travel + Leisure still attracts some of the world’s top investors. Institutions own 93% of the shares outstanding, which is always a great sign whenever there are concerns about a recession.
The company is also in the midst of a solid recovery from the COVID-19 pandemic, and despite the seasonal nature of revenue in the hospitality industry, revenue trends have been more or less consistent, which is a good sign.
The management team has had a solid track record of meeting earnings expectations, and we can see that for the past five quarters, they’ve performed exceptionally well with four beats and one small loss. It’s also worth noting that the winter period tends to be one of the strongest quarters for rental companies.
The company is also trading at the low end of its historical range for most relevant multiples, which usually implies value.
There is also the strong dividend and good history of buybacks in this space which will provide some incentive for investors as they wait for the trade to complete.
In closing, the key point here is to improve the penetration of the younger segment of the economy. The risk of non-payment is, of course, increased at the moment, but a fairly high percentage of company owners have repaid their loans. In the long term, I believe Travel + Leisure will be higher than current levels, but in the short term, there are some serious risks that an investor should consider before taking a position. For this reason, I rate Travel + Leisure a long term purchase.