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Wyndham Rides the Strength of Vacation Ownership

By Michael Lewis – Feb 13, 2014 at 1:23PM

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Though lodging performed well, the company's timeshare business is taking off along with its industry.

Hospitality and lodging is one of the high-growth industries for the next few years, and Wyndham Worldwide (TNL 1.25%) is going along for the ride. After a rocky but nonetheless upward ride throughout 2013, the company appears set for more growth on the income statement and in stock price. Wyndham can appeal to a few different types of investors -- value-seekers, growth-hungry, and income-loving. The company is attractively priced at roughly 14.5 times forward-earnings prospects, has the tailwinds of the hotel industry's bullish future, and recently upped its dividend by 21%. Don't let the stock's recent pullback scare you -- this is one sound play on hospitality.

A penny's worth
The market wasn't impressed with Wyndham's earnings, which included an adjusted bottom line of $0.73 per share -- 16% more than the prior year's number and about a penny under analyst expectations for the company's fiscal fourth quarter. Adjusted EBITDA was up 10%, as well.

Leading the way for the company is vacation ownership (timeshare) and plain old hotel-room bookings. Lodging grew sales by 10% to $245 million. In the U.S., RevPAR -- the go-to unit level metric for hotels; stands for "revenue per available room" -- gained an impressive 4.7%, while systemwide the figure grew 3.8%.

Vacation ownership saw sales grow 12% to $658 million. The figure really puts into perspective the fact that Wyndham is much more a timeshare business than it is a hotelier -- at least by the numbers.

How does it stack up?
If we treat Wyndham more as a vacation ownership business than a diversified hotel business, it's easier to compare to peers. A few basic points mark the timeshare business -- extremely high marketing expense with the potential for tremendous cash flows. Marriott Vacations Worldwide (VAC 0.18%) is the closest competitor, though it is a much smaller company by market cap. Marriott Vacations is a fast-growing business, spun off from its hospitality parent a little more than three years ago. With a huge development pipeline and healthy sales, the company is growing earnings and sales by the double digits -- exceeding the recent results from Wyndham.

Marriott trades at a richer 18.6 times forward earnings and has an EV/EBITDA of roughly 10 times. Wyndham appears cheaper at 14.5 times earnings but with a heavier balance sheet picks up a richer EV/EBITDA of just under 12 times. Neither company is overlevered considering the asset-heavy business model, but Marriott's operating level valuation is definitely more appealing.

Both companies will likely continue their upward trajectories based upon the industry tailwinds and strong, long-running brand names. Wyndham may be a slightly less risky play given its lodging segment. If timeshare demand takes a dive, Marriott Vacations has little to fall back on.

Investors looking for a comfortable, attractively priced play on the hot hotel and timeshare industry should take a close look at Wyndham.

Michael Lewis has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Travel + Leisure Co. Stock Quote
Travel + Leisure Co.
$38.15 (1.25%) $0.47
Marriott Vacations Worldwide Stock Quote
Marriott Vacations Worldwide
$147.50 (0.18%) $0.26

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