That the tourism industry, and especially the lodging, vacation rental and time-share segments, are subject to the national and global economy’s cyclicality is nothing new. However, surviving the dramatic effects of a recession is difficult, and thriving afterwards even more so. But Wyndham Worldwide Corporation (WYN, Financial) has been one of the most successful industry players in this regard, having returned from a 12% revenue decline in 2009 to a current impressive 21.2% growth rate. While fourth quarter 2013 showed impressive financial results for the company, sporting quarterly revenue of $1.20 billion, and 9% EBITDA increase, many investment gurus like Ken Heebner (Trades, Portfolio) and Steve Mandel (Trades, Portfolio) rushed to buy shares. So, let’s see if this investment will bring profits or losses.
A Profitable Three-Legged Business Model
A few weeks ago, Wyndham’s vacation rental division (31% of revenue) celebrated the milestone anniversaries of several brands (Hoseasons, Chez Nous, etc.), leaving its landmark as one of the largest and most successful global operators of time-shares and hotels. A large part of this firm’s profitability is due to its diversified business model, comprised of the aforementioned vocational rental segment, the Wyndham hotel group (19% of revenue)’s hotel franchising division, and the vacation ownership segment (50% of revenue), which manages time-share properties. The company’s hotel division has been in the headlines this week, due to the new franchise agreement that the iconic The New Yorker Hotel signed with Wyndham. The deal will transform the hotel, investing over $100 million to update its ballroom and add almost 600 rooms in the landmark building. As with all franchise deals, the firm will benefit from the owner’s high switching costs, as well as the time extension of the contract (10 to 20 years), contributing to the projected 2.6% CAGR for total hotel rooms.
However, while consumers are still recovering from the last economic recession, credit conditions have tightened for time-share purchases, thereby restricting leisure spending. Thus, Wyndham has sustained its increased EBITDA margins by focusing on its Asset Affiliation Model program. By offering fee-for-service solutions regarding time-share sales, financing, and property management to other time-share developers, EBITDA margins should grow in the long term to an average 30.3% by 2022, offsetting some of the slow 5.6% annual sales growth. And although tighter credit conditions are not to be underestimated, as they could lead to a reduction of profitability in the time-share division, I believe the business model is solid enough to compete against rivals like Choice Hotels International Inc. (CHH, Financial) or Diamond Resorts International Inc. (DRII, Financial).
Valuation
Wyndham’s quarterly results were more than satisfactory and, in fact, exceeded most analysts’ expectations for the company. So, looking forward, investors should expect very solid results from this well-structured hotel and time-share operator. Earnings per share for 2014 are expected to range between $4.18 and $4.28, in line with 2013’s 16.1% growth rate, while 2013’s $5.08 billion revenue jumps to $5.25 billion this year, due to adequate growth in all three of the company’s operating divisions. The highly attractive 26.6% returns on equity should remain in the long term, as Wyndham reduced its number of shares outstanding by 7% last year through share repurchases.
The current operating margin of 18.17% is stable and may increase looking forward, a consequence of lower fixed costs. On another note, I like the company’s 1.72% dividend yield, despite its position below industry average. Considering this firm’s balance sheet and metric growth, I also think the trading price of 22.0x trailing earnings is on spot relative to the industry median of 21.6x. Any investors looking for a promising opportunity in the lodging industry should jump on Wyndham’s train.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.
