This Hospitality Stock Should Stay in Your Portfolio

Wyndham Worldwide (NYSE: WYN  ) isn't your average hospitality company. It virtually doesn't own any hotel properties and has a larger timeshare business than its peers. These characteristics help to differentiate Wyndham from its lodging peers like Hilton Worldwide Holdings  (NYSE: HLT  ) and Marriott International (NASDAQ: MAR  ) , making it a more attractive investment.

Diversified revenue streams and asset-light business model
In a cyclical industry like hospitality, it always pays to diversify. Wyndham is highly diversified with revenue generated from multiple businesses: hotel franchising, timeshare exchange and rentals, and timeshare vacation ownership. It only generates about a quarter of earnings before interest, taxes, depreciation, and amortization from the hotel segment.

In contrast, Hilton only derives about 11% of EBITDA from its timeshare business, while Marriott is now almost a pure hotel company after spinning off its timeshare business in 2011. Wyndham also isn't diversifying purely for the sake of risk reduction. In fact, it is the global leader in each of the three segments it operates in.

Wyndham also runs on an asset-light business model, where about 63% of its earnings are derived from recurring fees from hotel franchising, vacation exchange, vacation rentals, and property management.

Wyndham's choice of an asset-light model is validated by the actions of its peer Hilton. Hilton has added more than 200,000 rooms to its hotel management and franchising business since 2007, growing the EBITDA contribution of this segment from 47% in 2007 to 52% now. Although Hilton is moving toward a capital-light model with increasing income contributions from hotel management and franchising as well as timeshare, Hilton is still more 'asset heavy' than Wyndham, having generated more than a third of its trailing-12 months EBITDA from its hotel- ownership business segment.

Strong free cash flow generation and capital allocation capabilities
Wyndham has generated positive free cash flow in every year since 2009 and has set its annual sustainable free cash flow target at $750 million -- something which it has achieved for the past three years. Wyndham's trailing-12 month free cash flow margin is also significantly higher than its peers at 17.6%. In comparison, Hilton and Marriott sport free cash flow margins of 11.1% and 3%, respectively.

Wyndham is also excellent at capital allocation, utilizing its free cash flow for dividends and share repurchases to create further shareholder value. Its forward dividend yield of 1.7% is higher than Marriott's 1.4% yield; Hilton doesn't pay a dividend.

Other than dividends, Wyndham spends the bulk of its free cash flow on share repurchases ($623 million in 2012). As a result, it has reduced its number of outstanding shares by 26% from 185 million at year-end 2010 to about 136 million now. This has allowed Wyndham's earnings-per-share growth to significantly outpace its growth in operating income. While Wyndham delivered a three-year operating income compound annual growth rate of only 12.8%, its EPS grew by a CAGR of 19.5% over the same period.  

Misunderstood vacation-ownership business
There are also certain misgivings about Wyndham's vacation-ownership business, which contributed close to half of its 2012 EBITDA, because of two key misconceptions.

Firstly, Wyndham doesn't have to consistently invest in resort property developments or acquisitions to build a pipeline of new timeshare units, unlike the conventional vacation-ownership model. Wyndham's alternative business model is called the Wyndham Asset Affiliation Model (WAAM), where it will convert unsold properties to timeshare units for sale but keep property ownership in the hands of the original owners. This will help reduce Wyndham's asset intensity and improve returns on capital. Wyndham has signed four WAAM deals thus far for Myrtle Beach, SC, Orlando, FL, Smugglers' Notch, VT, and Destin, FL. 

Secondly, the credit risk associated with vacation-ownership debt isn't as high as perceived. For example, similar to automobiles and houses, a timeshare can be reclaimed and resold in the event of a default. Furthermore, Wyndham has also tightened its credit-management practices, resulting in FICO scores (a global standard for measuring credit risk) increasing every year from 656 in 2005 to 725 currently.

Foolish final thoughts
Wyndham doesn't fit the bill of a traditional hotel investment. It is asset light, free cash flow positive, and generates the bulk of its earnings from recurring fee income. These unique characteristics help to offset the inherent cyclicality of the hospitality business. Moreover, as investors have a better appreciation of Wyndham's vacation-ownership business going forward, Wyndham's share price should benefit.

Is this an another good under-the-radar stock?
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2848315, ~/Articles/ArticleHandler.aspx, 8/22/2014 9:36:51 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement