WYNDHAM WORLDWIDE CORP WYN
September 09, 2013 - 9:03am EST by
ima
2013 2014
Price: 60.00 EPS $3.85 $4.40
Shares Out. (in M): 133 P/E 15.5x 13.5x
Market Cap (in $M): 8,000 P/FCF 10.0x 8.5x
Net Debt (in $M): 4,300 EBIT 955 1,055
TEV ($): 12,300 TEV/EBIT 13.0x 11.6x

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  • Potential Buybacks
  • Timeshare
  • Growth stock

Description

Cheap, Timeshare business is misunderstood. Management returns all capital to shareholders

 
1) trades at 10x FCF because the market believes WYN is over earning in their timeshare business (50% of revenues). We are far from peak sales, the amount of over earning is not that meaningful and its PV gets you back to 10x FCF
 
While WYN is overearning, it is not substantial. Topline growth should continue for years. Underlying industry data from ARDA, covering public and private companies, shows healthy industry growth of over 6% in the US. Public companies are taking share and will continue to. Adoption in international markets is 1/3 that of the US based on my estimates. 8M US households own timeshare out of a TAM of 55M. with the industry moving to a points based system where you buy the right to a week's vacation in any of the brand's hotel, the adoption rate should rise. Calls to industry participants indicate the market is far from reaching saturation.
 
The area's where WYN is overearning represent 15% of FCF. WYN trades at 11.5x normal FCF but the NPV of the areas where the over earn cancels that out. 2013 consensus FCF is $842M. in the future, they will spend $40M on ABS debt as the interest rate rises from 4.5% to 6.5%. COGS will rise $30M as current inventory valuations are below normal. Higher cash taxes of $75M. if they go to a 50% asset light model, they will pay more for inventory and COGS will rise a further $20M. Current capex is $50M above normal because they are spending on IT etc. the net impact is $116M or 14% of FCF. the PV of all these benefits is an estimated $900M.
 
 
2) WYN and other public timeshare companies will take share and dominate this market.
 
Based on ARDA data, the public companies sell timeshare at higher ASPs because of their brand, have better sales conversion rates thereby lowering their COA, pay lower interest on ABS debt, have higher credit quality scores, lower operating expenses and lower COGS. They are taking share at a dramatic pace. they will move to an asset light model where they buy nearly completed inventory from their private competitors, rebrand the facilities and sell the units. this reduces their capital requirements and reduces the downside in the even of a recession. the model is win win for both parties since public companies have much higher ROIC than private ones.
 
3) 50% of the business is asset light hotel and rental. very high quality. peers trade well north of 15x FCF, implying that the timeshare business is valued at less than 8x FCF
 
4) excellent management team that uses all FCF and increased debt to buyback shares and pay dividends
 
assuming 5% EBITDA growth, at current prices the company can return 12% FCF to shareholders (10% FCF yield plus 2% from maintaining their debt ratio to a growing EBITDA). that is a 17% IRR before the impact of re-rating.
 
risks
1) cyclical. a recession would wipe out the FCF of the timeshare business. However, they will not bleed cash like in 2008. the amount of inventory on hand isn't as bad, credit scores are better and the industry is in much better shape.
2) rising rates. as mentioned, I included that in my forecast. rising rates is why the stock is selling at $60 and not $70.
 
 
I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

continued growth in the timeshare business
continued buybacks....
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