Hospitality is set to be one of the fastest-growing industries over the coming decade. In that industry, Marriott is one of the biggest names. Yet it may not be the hotel business that is most compelling to investors, as Marriott Vacations Worldwide (NYSE:VAC) continues its near-vertical trajectory since its spinoff in late 2011. Recession-weary investors once neglected the time-share business, but the sector is proving to be a winner for contrarian and now growth-hungry investors. Marriott Vacations is finding its various revenue streams growing -- from partial ownership sales to management fees and more. To sweeten the deal, the stock still trades at a reasonable valuation.
The company recently reported plum fiscal third-quarter earnings to the delight of investors and analysts. Adjusted EBITDA rose a whopping $17 million to $50 million, while adjusted net income went from $0.23 per share to $0.72 per share. The company's margins continue to improve (especially important in a marketing-heavy business), while volume-per-guest gains aided in bringing in more cash.
Contract sales actually decreased slightly in the third quarter -- down $3 million, which is to be expected given the tepidity in the consumer-spending environment. North America actually had a $10 million gain, but Europe and Asia kept the net sales numbers negative. North America was especially buoyed by lower marketing expenses.
Rental revenues grew 17%, while management fees ticked up $2 million to $62 million.
All around, Marriott Vacations delivered an impressive report when considering the economic headwinds it faced. But, as with any prospective investment, the key is what happens next.
A game of inches
A time-share business gets its lion's share of revenue from contract sales. The bottom line on contract sales is greatly influenced by marketing spend, given that the business involves a very substantial, very forward sales force to move the units. When Marriott Vacations is able to shift marketing spend down even a small amount, the resulting incremental profit and cash flows blossom.
According to a recent Wall Street Journal article, a 1% improvement in the marketing margin equals $7 million in additional EBITDA.
This gives Marriott Vacations a few options, all of which could benefit the company and its investors. More money spent on marketing leads to higher contract sales. Those sales prop up the other areas of the business -- financing, management fees, etc. -- benefiting the entire company. On the other end, if the company can continue improving its marketing efficiency, the top line becomes less important and the cash flow still grows at substantial rates. Of course, there is the delightful option of both happening at the same time. Greater contract sales and less marketing spend -- growing both top and bottom lines.
As the company moves forward, it can pull those levers as needed. At the moment, it appears the third and most lucrative option appears to be playing out, despite the softness in Europe and Asia.
The best part is, at slightly more than 18 times forward earnings, Marriott Vacations isn't priced for the stars. It trades at a slight discount to Diamond Resorts International, another time-share company, and less than some traditional hotel chains such as Hyatt (40 times forward earnings). Moreover, the company is able to generate higher cash flows with greater ease than the traditional hotels.
All in all, Marriott Vacations remains a compelling pick for investors interested in the fast-growing hospitality industry.