Wyndham Worldwide Seems to be Attractive at This Valuation

Wyndham Worldwide has the lowest valuation and highest dividends compared to its peers including Hilton and Marriott. In a long run, it could deliver good return to its shareholders.

Feb 6, 2014 at 6:34PM

Meryl Witmer, the general partner of Eagle Capital Partners and a board member of Berkshire Hathaway, has revealed one of her favorite stock picks: Wyndham Worldwide (NYSE:WYN). It seems to be expensive at first glance, trading at more than 16.7 times its forward earnings. Let's take a closer look to determine whether or not we should follow Meryl Witmer into Wyndham, or if its peers such as Hilton Worldwide Holdings (NYSE:HLT) and Marriott International (NASDAQ:MAR) are better buys.

Wyndham is undervalued with its double-digit return businesses
Wyndham is the owner of 30 primary brands, including Wyndham Hotels and Resorts, Ramada, Days Inn, and Howard Johnson. It operates in three main business segments: lodging, vacation exchange and rentals, and vacation ownership (which refers to timeshares). It generates 60% its revenue by providing services such as property management and vacation exchange and rental services. The vacation ownership business is the main revenue and EBITDA (earnings before interest, taxes, depreciation and amortization) contributor, accounting for 50% of the total revenue and 52.5% of the total EBITDA in 2012. 

When interviewed by Barron's, Witmer commented that the first two businesses were fantastic and enjoyed more than 20% returns on tangible assets. Because of this, they should fetch higher multiples. The timeshare business' return on tangible assets was the lowest, at 13.5%. She thought that Wyndham was undervalued because investors did not like the timeshare business. Its lodging business normally had $40 million in capital expenditure and generated around $300 million in EBITDA. 

Witmer was excited about the company because it had allocated capital quite wisely, reducing its total share count from 199 million to 132 million. In the third quarter 2013, around 2.7 million shares have been retired for $160 million. Effectively, it has decreased its year-over-year weighted average diluted share number by 7%. 

She expected that the after-tax free cash flow could get to $7.30-$8.00 per share. With a 13-15 times the after-tax free cash flow, it should be worth around $95-$119 per share.

Lower valuation but higher dividend yield than peers
Wyndham could fit well in income investors' portfolios, with a consistent share buyback and a decent dividend yield at 1.60% and a conservative payout ratio of only 35%. Compared to Hilton and Marriott, it seems to be the most attractive in terms of both valuations and dividends. While Hilton does not offer shareholders any dividends, the dividend yield of Marriott is a bit lower at 1.40% with a payout ratio at 28%.

Among the three, Hilton is the most expensive hotel business, valued at as much as 33.3 times its forward earnings. Just recently being relisted on the stock market, Blackstone has managed to turn Hilton around and made the old buyout deal quite profitable.

Hilton was taken private by Blackstone for a whopping $26 billion in 2007, a premium price at the peak of the market. That was a formula for disaster. However, Blackstone has successfully paid back a lot of debt and improved the company's operating performance. With a 76% ownership, Blackstone's stake in Hilton is worth more than $16.4 billion; this gives Blackstone an unrealized profit of $9.8 billion.

Marriott also has a higher valuation than Wyndham. At $49 per share, Marriott is worth nearly $14.7 billion and is valued at more than 21 times its forward earnings. Marriott also returned cash to shareholders via share buybacks. It has repurchased 16.6 million shares year-to-date. For the full year 2013, the company expected to return as much as $1 billion to shareholders via both dividends and share repurchases. 

My Foolish take
The drag on Wyndham's share price from its lower-return timeshare business could create a good opportunity for long-term income shareholders. As Wyndham continues to grow its free cash flow and returns more cash to shareholders via both dividends and share buybacks, the company will deliver a decent return to its investors in the future.

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