Shares of Marriott Vacations Worldwide (VAC) have underperformed significantly over the past year, losing about one-third of their value. Losses related to the Hawaii fires last year and increasing consumer credit delinquencies have weighed on results.
The company’s first-quarter earnings for 2024 showed mixed results, with revenue growth but a decline in earnings. Despite the challenges, there is a potential for relative value given the underperformance and the possibility of a turnaround in consumer credit trends.
This article explores whether VAC’s current valuation presents a more compelling investment opportunity.
Company Overview
Marriott Vacations Worldwide is a provider of vacation ownership programs, operating over 120 resorts with approximately 700,000 timeshare customers. The company offers a range of vacation experiences, including timeshare ownership, exchange programs, and rental properties.
Its business model relies heavily on financing margins from vacation ownership loans, making it sensitive to consumer credit trends.
Recent Financial Performance
In the first quarter of 2024, Marriott Vacations reported adjusted earnings per share (EPS) of $1.80, which beat consensus estimates by $0.07. Revenue increased by 2.6% year-over-year to $1.2 billion. However, EPS fell by 29% from the previous year.
The company’s ownership sales declined by 1% to $428 million, impacted by a 4% headwind from Maui, which is still recovering from last year’s fires. Management is targeting 6-9% contract sales growth, with Maui nearing pre-wildfire travel levels.
Adjusted EBITDA fell by 8% to $187 million, despite a $5 million reduction in general and administrative (G&A) costs. The increase in corporate interest expense by $6 million to $40 million, due to higher rates, also weighed on results.
However, the company has well-laddered corporate debt maturities, which should limit further increases in interest expense.
Challenges and Risks
Time share purchases are discretionary and cyclical, making them vulnerable to economic downturns. While there is no expectation of a recession, a significant acceleration in economic activity is also not anticipated.
Additionally, VAC’s existing owners are spending less on site, with volume per guest down 5% to $4,129, partly due to a mix shift away from Maui.
One of the core issues is the increase in delinquencies on unsecured vacation ownership loans. In Q3 2023, VAC took a $59 million charge to build reserves due to increased loss assumptions.
The company has $2.22 billion of vacation ownership notes receivable, primarily placed in debt securitization variable interest entities totaling $2.18 billion. These securitizations are legally non-recourse, meaning VAC can walk away from them if defaults rise dramatically.
However, these structures are significant sources of cash flow, with financing revenues rising by $5 million to $83 million, while financing expenses increased by $8 million to $34 million.
Management has guided to about $780 million of EBITDA for the year, up about 2.5% from last year, and $400-$450 million of free cash flow. However, this forecast assumes netting about $220 million from its securitization program. Given ongoing delinquencies, there is a risk of needing additional reserves, which could reduce free cash flow.
Valuation and Comparative Analysis
From a valuation perspective, VAC trades at approximately 12x expected EPS of $6.80-$7.1 for the year. Despite its challenges, the company’s current valuation does not appear overly expensive.
Even with potential risks, VAC can generate sufficient free cash flow to cover its 3.6% dividend and some share buybacks, as evidenced by the $24 million of repurchases in Q1.
However, given the significant reliance on financing margins from securitizations, investors might find better opportunities in other consumer credit names such as Ally Financial (ALLY), which trades at about 10x forward earnings and has already accounted for sufficient reserves.
Conclusion
Marriott Vacations Worldwide has faced significant challenges over the past year, including increased delinquencies and the impact of the Hawaii fires. While the company’s recent financial performance shows some positive signs, the ongoing risks related to consumer credit trends and discretionary spending pose challenges.
The current valuation of VAC, trading at 12x expected earnings, suggests it is not overly expensive. However, given the significant reliance on securitizations and potential need for additional reserves, it might not yet present a compelling opportunity for outperformance.
That said, VAC can still provide a decent return to shareholders through dividends and buybacks, making it a potential market performer. Investors seeking exposure to consumer credit trends might prefer other names like Ally Financial, which offers a more attractive risk-reward profile at this time.
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I’m Nathan Goldstein, a writer and political analyst focused on simplifying complex social and political issues. My writing breaks down the intricacies of today’s society and politics to make them more understandable for you. I’m committed to providing clear and well-informed insights.
