Timeshare developer Sunterra
Being a vacation ownership operator seems like it should be an easily profitable business. Develop properties in "destination spots" in North America, the Caribbean, Mexico, and Europe and sell each one 52 times while retaining ownership of the real estate upon which they sit. Sunterra is one of the world's largest timeshare operators, with more than 90 resorts sprinkled across the globe. Yet competition, though fragmented, is stiff.
While there are few pure timeshare plays in the market -- just ILX Resorts
Sunterra's current woes can be attributed to the high costs of sales and marketing. Such costs account for more than 50% of the company's expenses, which is spurring the realignment of its European segment, or more specifically, the telemarketing operations of its United Kingdom properties. In the quarter ended this past March, European revenues fell 11% -- including favorable currency exchange rates -- and losses exploded more than six-fold to $3.8 million. For the 2005 fiscal year, Sunterra is expecting revenues to fall 20% below prior expectations.
The timeshare operator's North American operations don't seem to have the same problems. Indeed, last quarter that segment's revenues rose 40% over the previous year to nearly $76 million. The jump was largely attributed to greater sales linked to a switch to a points-based system of vacation ownership rather than the typical fixed-week program. The points program is Sunterra's fastest-growing initiative.
Under typical timeshare arrangements, customers buy a specific week of time at a specific resort. If the owner wants to visit a different vacation spot, he has to "bank" his week in a timeshare consortium like Resorts Condominium or Interval International and pay separate fees to those organizations. With the points system, an owner buys a specific number of points -- which cost about $2 each -- and he can use them toward vacation time at any resort in the company. Like the fixed-week programs of the past, points are like currency or property and can be transferred to others, given away, or even willed to heirs.
But no matter the system, marketing timeshares is expensive and travel to Europe has been suffering recently. Apparently, even Europeans aren't traveling around Europe. While Sunterra sports a trailing P/E of just three, making it appear cheap, its enterprise value-to-free cash flow ratio of 36 shows that it's not necessarily a bargain, even at share prices 15% below its 52-week high. Sunterra, it seems, could use a vacation to recover its shine.
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