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Silverleaf Resorts, Inc. (SVLF) – Investigating the Revenues

|Includes: Silverleaf Resorts, Inc. (SVLF)

 How a company generates its revenues is as important as how much revenue the company generates. In order to avoid negative surprises, the value investor must investigate the company’s sources of revenue and identify any potential weaknesses. Luckily, companies provide a lot of information about revenues, including source (by product, geography, division) and concentration in their 10-K’s. Sometimes, however, you have to dig a bit beyond the disclosures.

Consider the case of Silverleaf Resorts, Inc. (NASDAQ:SVLF), a timeshare resort operator based in the United States. Timeshare resorts allow purchasers to pay once for the right to stay at the resort for a specific amount of time each year, rather than having to pay an escalating amount to rent a hotel. Silverleaf has, perhaps surprisingly, been able to maintain extremely stable gross revenues throughout the recession (surprising in that their product is far from being a necessity). Silverleaf finances the bulk of the purchase price, earning a high interest rate, and then obtains financing from a variety of sources at a much lower interest rate, thereby earning the net interest. Also surprising is the fact that Silverleaf has been able to increase the net interest margin throughout the recession!

On the surface, Silverleaf looks like a great business. However, when you look through their past decade’s worth of 10-K’s to pull together where Silverleaf is generating its revenues, a different picture emerges. The following table shows Silverleaf’s sales to existing customers as a percent of total sales:

  2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
% of Sales to Existing Customers 62% 59.8% 59.7% 55.7% 55.2% 52.4% 26.4% 34.1% 32.3% 32.5%

As you can see, Silverleaf has become extremely reliant on sales to existing customers. Sales to existing customers include upgrades to larger/better units and upgrades to the more expensive timeshare resorts. Although selling upgrades to existing customers is a great opportunity for any business in that it requires less marketing expense and enhances the relationship with and commitment of the customers, it can only stretch so far. Customers can only upgrade so far and so frequently before they are happy with what they have. With more than 700 salespeople (double the number from ten years ago, when the company had far less reliance on existing customers for generating sales), it doesn’t appear that the company is slowing its efforts to sell outside the existing clientbase (in fact, they have launched several initiatives to attempt to bring in new clients, including free hotel nights in the region if the potential customer comes for a tour).

Another scary statistic emerges when you compile their disclosure of the number of foreclosures each year based on customers who are failing to pay the ongoing membership dues. In 2005, this was 545, whereas last year it was 1570. This is over a period that has seen stability in the average FICO score of customers, so it might be the case of the company overly relying on FICO scores rather than instituting more thorough checks for identifying cash-strapped customers that should be avoided.

What we may be seeing is a saturation of the target market which could lead to potentially severe revenue declines in the future if the company fails to once again appeal to individuals who are financially sound and who are not currently clients. This is a red flag for value investors and something to consider carefully when making the decision to invest.

Author Disclosure: At the time of publication, the author DOES NOT have a position in securities of this company.

Read more: Silverleaf Resorts, Inc. (NASDAQ:SVLF) – Investigating the Revenues | Frankly Speaking 
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