My baby sitter recently had to call on my wife's legal services to extract her from a timeshare purchase (also known as a "vacation ownership interest" or VOI). Although the salesman probably didn't do anything but hook a gullible buyer, the baby sitter still felt she'd been duped. Whether or not she had been, the timeshare industry has always had a bad rep hanging over it that has kept its stocks from ever reaching their fair intrinsic values. Both Vistana, Inc. and Trendwest Resorts had outstanding financials, yet never traded at more than 70% of what they should have in my opinion.
Once the bastion of fraudsters, the VOI industry cleaned up its act in the '90s, and business boomed along with the economy. VOIs make for a brilliant business. A VOI company gets a bank loan to build a resort. Then the company sells each condo 52 times (most timeshares are for a week). Some buyers even finance their purchase through the timeshare, paying a higher rate of interest to the timeshare company than the rate of their own bank loan. Thus, the company sells the condos for far more than they paid and they still own the real estate the resort sits on! Brilliant!
The best managed VOI companies such as Vistana and Trendwest were bought out by the big hotel chains -- StarwoodHotels and Resorts (NYSE:HOT), Hilton Hotels (NYSE:HLT), and Marriott Corporation (NYSE:MAR). In both cases, I believe management sold out for far less than their respective businesses were really worth. Maybe they got fed up with the market's refusal to value them properly. Either way, VOIs make big bucks for these chains.
Now the only timeshare plays left are Sunterra Corporation (NASDAQ:SNRR), ILX Resorts, Inc. (NYSE:ILX), and Bluegreen Corporation (NYSE:BXG), which also sells real estate for intended homesites. Unfortunately, neither Sunterra nor ILX has particularly compelling financials. Worse, ILX is dealing with a lawsuit that alleges -- you guessed it -- abusive and shady sales tactics. Only Bluegreen has good numbers and is arguably undervalued, but it isn't a pure play.
Normally, stock bargains can be found among companies involved in a distasteful business, or that are the victim of investor misperception. But sometimes a reputation becomes more real to investors than the truth. When that happens, the reputation becomes the truth, and the stock may forever wallow.
Fool contributor Lawrence Meyers felt cheated when Starwood bought out his Vistana shares for a low-ball price, and does not own any stocks mentioned in this article.
