Travel + Leisure (NYSE:TNL) has been quietly rebuilding its vacation ownership business following the COVID pandemic. The company spun out of the global hotelier giant Wyndham, leaving many to question the company’s future, some even going as far as to suggest that the spin-out would signal the end of the timeshare industry as we knew it. Things have turned out quite differently for the company. Under the leadership of industry veteran Michael Brown, the company has managed to withstand major structural changes and a global health crisis that disproportionately affected the hospitality industry. As if that were not enough, the company is now facing the prospect of a major global slowdown as central banks try to address rampant inflation. Despite this, the company looks to be firing on all cylinders and is stepping into a crucial next few quarters that will provide investors with insight into the company’s resilience as we look to start the next business cycle.
Today we will take a look at Travel + Leisure and discuss what investors can expect from the company going forward (I have covered the company in the past, for a more detailed company profile, check out this article).
Following the spinout, I must confess that I had my fair share of reservations as to whether the company could maintain its strong sales volume without making concessions in the per-unit price, which would, of course, impact gross margins. So far, this concern has proven to be unfounded, as the company is posting gross profit margins north of 60%.
This is an amazing number. Remember, this is not a software-as-a-service type business. Instead, the company is selling vacation ownership interests in its existing portfolio to customers it likely had to pay marketing costs to acquire. These marketing costs manifest mainly in the form of the gifts the company offers to entice people into attending sales presentations. Timeshares are notoriously tough sales, and it often takes multiple visits to finally convince a customer to purchase. This is why investors tend to pay keen attention to gross margin and marketing costs figures, as it provides major insight into the overall appeal of the product. Right now, Travel + Leisure is clearly knocking it out of the park.
In the recent earnings call, the company reported an impressive Adjusted EBITDA of $230 million, which was good for an EPS of $1.27 cents. They also managed to produce a record volume per guest of $3489. Volume per guest is in effect the amount of money the company makes per tour it undertakes. The interesting thing about this is that for the second quarter, more than 65% of new owner sales were to Gen-Xers and millennials. The importance of this cannot be overstated when you consider the background of the timeshare industry. Airbnb (ABNB) and other alternative vacation options were being touted as timeshare killers. The general expectation was that as these services became more popular, the timeshare industry would eventually die out. The company managing to create profitable relationships with younger owners is so crucial. It is also worth mentioning that new owner sales typically carry a lower VPG than existing owner sales, and that new owners tend to come back and purchase additional ownership down the line. The company also mentioned that nearly 80% of its owner base is traveling debt free. This means their vacation ownership is fully paid for, and their only commitments are the annual maintenance fees. It would be fair to say that the company it’s currently in a good place with its owner mix and is showing signs that it is developing further in the right direction. But with the economic slowdown on the horizon, there are some concerns about the business model’s vulnerability to defaults.
Timeshares are, first and foremost, a luxury purchase. Vacations are often seen as optional endeavors, even though they probably should take higher priority. Timeshare companies help their customers go on vacation by having them commit to the purchase of an ownership interest in a property or portfolio, allowing them to lock in the price of their vacations for the most part, apart from occasional adjustments to annual maintenance fees. Because timeshares tend to be pricey big-ticket purchases, customers tend to finance the purchase at least partly with debt. This practice is normally fine, and the company does a great job at screening its clients to make sure that they can handle the financial commitments that come along with the purchase. But if there were to be a widespread economic slowdown as a result of the Federal Reserve tightening to address inflation, for example, the fallout would not only dent consumer confidence which would be a headwind for new purchases, but it could also result in greater than normal delinquencies in financed vacation ownership products which can become quite problematic for these types of companies. The good thing is that these companies are becoming better at working with customers through difficult times to keep their owners happy and to prevent widespread damage to the company.
Valuation And Forward-Looking Commentary
Despite these concerns, Travel + Leisure still attracts some of the premier investors in the world. Institutions own a whopping 93% of shares outstanding, which is always a great sign whenever there are concerns about a recession.
The company is also in the middle of a solid recovery from the COVID-19 pandemic, and despite the seasonal nature of revenue in the hospitality industry, revenue trends have been more or less stable, which is a good sign.
The management team has had a solid track record of delivering to earnings expectations, and we can see that for the last five quarters, they have performed exceptionally well with four beats and one small miss. It is also worth mentioning that the winter period tends to be one of the stronger quarters for timeshare companies.
The company is also trading at the low end of its historical ranges for most of the important multiples, which usually implies value.
There’s also the solid dividend and good track record of repurchases in this space that will provide some incentive for investors while they wait for the trade to pan out.
In closing, the main highlight here is the improvement in the penetration of the younger segment of the economy. The risk of defaults is, of course, heightened for the time being, but a fairly high percentage of the company’s owners have paid off their loans. In the long term, I do believe that Travel + Leisure will be higher than current levels, but in the short term, there are some serious risks for the investor to consider before taking a position. For this reason, I rate Travel + Leisure a long-term buy.