Interval Leisure Group: A Great Play On The Global Hotel And Resort Boom

| About: ILG, Inc (ILG)
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Summary

The company just posted strong Q4 and full year results, lead by an impressive jump in free cash flow.

Membership and exchange business provides steady cash flow allowing Interval to invest in the faster-growing management and rental segment.

Interval has higher margins and trades at lower multiples than competitor Marriott Vacations Worldwide.

Look for the management and rental segment to be the prime growth driver going forward.

Interval Leisure Group (IILG) is the best play on the growing vacation resort management market. This comes as the company looks to transition its business model away from the vacation exchange, in hopes of further diversifying itself. More importantly for investors, Interval looks to be a better play on the vacation management space than leading competitor Marriott Vacations Worldwide (NYSE:VAC). Furthermore, Interval remains underfollowed, with only four sell-side analysts covering the company. I look for shares to return to their 52-week highs seen last year.

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Q4 results

Interval Leisure saw Q4 revenues rise 10.3% over last year. EPS rose 18.5% to $0.32, which was $0.04 better than expectations. Net income for the quarter was $18.5 million, compared to $15.3 million in the prior year. Adjusted EBITDA rose slightly from $34.1 million to $34.8 million.

Full year results were just as good

Total revenues rose 5.9% in 2013 to $501.2 million. This came as the company benefited from acquisitions in its management and rental segment. EPS for the full year rose to $1.40, up from $0.71 in 2012. Adjusted EBITDA increased slightly to $166.2 million.

Free cash flow was were the most impressive growth was. Free cash flow jumped from $29.8 million in 2012 to $95.2 million last year. Interval Leisure rewarded shareholders with the boost in free cash flow by paying out $18.9 million in dividends. The company's 1.6% dividend yield is only a 24% payout of earnings, and I see the dividend steadily increasing as free cash flow levels look set to rise.

Its membership and exchange business remains the laggard, but there's still potential

Although Interval has been built its business around the membership and vacation exchange market, that business is no longer a growth area for the company. However, overhead is minimal and requires little capex. This makes the segment a strong cash generator that Interval can use to fund other faster-growing initiatives, namely its management and rental segment.

The key for membership and exchange is the membership network. At the end of 2013, Interval had approximately two million members enrolled in its various membership programs. In this network are more than 2,900 resorts spread across 80 countries. Average revenue per member increased 2.6% year-over-year to $187.13, with the company maintaining a 90% retention rate.

I still believe there is some growth ahead in this market. Last year, Interval made 106 vacation ownership resorts affiliates in the U.S. and international markets. Most were located outside the U.S., where resorts/leisure travel is growing the fastest.

Interval continues to benefit from its membership mix, where 60% are traditional vacation-goers and 40% is corporate customers. In 2013, corporate membership increased 2%, which is a good sign that sign; suggesting that corporate spending is less discretionary, as well, it carries a higher average ticket. The one downside to corporate members is that even though they boost the top-line, margins tend to be tighter in this segment.

All in all, the greatest potential for the membership and vacation segment lies in Interval's platinum membership. Last year, the number of platinum members increased 30% to 120,000 members. Platinum members spend more than Interval's average member and I see growth in platinum membership helping offset any weakness in core membership. What will drive platinum membership is increasing the portfolio of properties available to platinum members. Again, Interval is excelling in this area by adding 106 resorts in 19 countries last year.

The management and rental segment is where it's at

My thesis behind recommending shares of Interval Leisure is based on its move into the management and rental of vacation properties. Year-over-year, management fee and rental revenue grew 72.2% in Q4 and 30.2% for all of 2013. This growth came from acquisitions as Interval is making a big push into this area. I see further acquisitions driving this segment's growth.

RevPAR at the end of last year was $138.90, an increase of 6.6% over RevPAR of $130.28 in 2012. I like the fact that the company was able to achieve a higher average daily rate at its properties. This signals that the company's properties are in growing markets. Adjusted EBITDA for the management and rental division rose 34.2% to $19.3 million for the full year.

Today, Interval Leisure is the largest non-developer manager of shared ownership resorts in the U.S. Its Aston and Aqua divisions now manage 50 locations in Hawaii, with additional properties in Guam and the U.S. mainland. I like that these two brands complement each other and create synergies, as well as cost savings. Interval looks to leverage the two brands with their combined buying power, which is a major selling point for guests and property owners.

The growth of these brands is the real key for investors in Interval. Since December 2013 alone, Aqua Hospitality has added five new properties, with a total of 850 rooms. Three of these properties are in Hawaii and two are in Guam, which are both strong vacation markets and markets to be in.

The other key to this segment is that Interval is the manager and not the developer. This year, the hotel owners within Aqua Hospitality's network will invest more than $60 million in property and hotel improvements. This will increase RevPAR down the road as vacation-goers chose Aqua Hospitality properties for their vacations.

Outlook

Interval should see accelerated earnings growth going forward after refinancing its debt last year. The lower interest expense will go straight to the bottom line. The company finished 2013 with $48.5 million in cash and $253 million in debt. Interval has $247 million available on its revolving credit facility, which may be increased by an additional $200 million if need be for a sizable acquisition if an opportunity presents itself.

I see EPS coming in at $1.45 for 2014 and $1.60 for 2015. Based on next year's estimates, share are trading at only 16.6x next year's earnings. This is also cheap considering the company's impressive margins. The gross margin is 64% and the operating margin is 27%. These margins are much higher than that of Marriott Vacations Worldwide, which sports lower margins, with a gross margin of 46% and an operating margin of 14%. Marriott Vacations Worldwide also trades at a higher multiple, as shares trade at 18.6x next year's earnings.

Bottom line

Interval remains one of the least-followed names in the vacation ownership business. Interval just renewed its affiliation with Starwood Vacation Ownership. This long-term agreement provides further stability to Interval's business and will include future resorts developed under the Westin and Sheraton brands in the U.S., Mexico and the Caribbean.

Its management and rental segment has shown impressive growth and will be the key driver of growth going forward. Since 2010, the management and rental business has grown from 25 properties to over 250 at the end of last year. Revenues have grown from $22.7 million in 2010 to $71.6 million last year. Even more impressive is that adjusted EBITDA has seen a 47.3% CAGR.

As the global hotel and resort boom shows no sign of slowing down, I see Interval Leisure as a great play on this growing trend. After all, hotel and property owners are going to require a property manager for their properties. Interval Leisure is one of the best plays on the space and one that remains underfollowed. Insiders remain the largest shareholders with a combined 34% stake in the company. Of the four analysts that follow the stock, three have Buy ratings and one a Hold. All in all, I see Interval Leisure as one of the best plays on the global tourism boom and the expansion of hotels and resort properties.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.