Hospitality Sweet by Leslie P. Norton
Summary: Wyndham Worldwide Corp. (WYN) makes the lion's share of its cash flow (74%) from the time-share industry, in the form of hotel bookings (41%) and a vacation exchange which facilitates time-share trading for its 3.4M members. Once considered a shady business, time-share is now used by industry giants like Marriott International Inc. (MAR) and Walt Disney Company (DIS). The industry has posted double-digit growth for most of the last twenty years. Since becoming its own entity last August (it was spun out from Cendant) at $32, share are up only $3, and its trailing-earnings ratio is just 20x, vs. 24x for Starwood Hotels & Resorts Worldwide (HOT) and 28x for Marriott. Possible reasons: an under-appreciation of the time-share model; its hotel properties are low-priced and geared towards leisure travellers, while industry strength is perceived in the luxury and business segments; the average time-share client (income $85,000, age 58) is seen as 'uncomfortably stretched' in today's economy. CEO Stephen Holmes counters that defaults on time-share finance payments have remained stable due to their relatively small size, and says a recent $600M note offering backed by time-share receivables was "way oversubscribed." Earnings tripled in Q1 2007 on an increase in room revenue, strong vacation-ownership demand, and an acquisition. The company upped its 2007 guidance from $1.98 to $2.17 (vs. $1.70 in 2006), announced a $0.04 cash dividend to begin in Q3, and is repurchasing shares. Gabelli & Co.'s Amit Kapoor says the overrated concerns make Wyndham an "exceptionally cheap" stock. Using 12x 2007 cash flow minus net debt, he puts shares at $58, 66% above current prices.
WYN vs. Dow Jones U.S. Hotel index