MAR/VAC: VALUE CREATING TRANSACTION

We think some investors may be waiting for the spin-off to own MAR. 

 

 

Marriott Vacation Worldwide (Ticker: “VAC”) will start trading on an as issued basis tomorrow.  As we wrote about in “It’s Not the Economy, Stupid” (08/25)”, the spin-off of Marriott’s timeshare business will be a long-term value creating transaction positive.  

 

Most lodging investors do not love the timeshare business - capital intensive and cash flow negative during periods of revenue and GAAP earnings growth - but as long as the business is small enough, they generally ignore it when thinking about value and multiples.  As a separate entity, VAC should grow the business with their shareholders aligned with growing the company, while MAR benefits by getting a high multiple fee revenue stream that grows with the growth of VAC’s business – which should be at a faster rate than if VAC was still under the MAR umbrella.

 

We think that VAC is worth about $2.10 to MAR or approximately $1BN.  Stripping out the timeshare business, MAR is trading at just 10x 2012, close to trough valuation on a business where 90% of the gross margin is fee driven.  MAR should trade well above prior trough valuation levels since the business is of much higher quality.  Incentive fees are now a smaller part of the pie and the only timeshare exposure is fee driven, and we’re at a different point in the cycle.

 

We think that VAC will do about $135-140MM of EBITDA in 2012 and that 7.0-7.5x EBITDA (or 17-18x P/E) is an appropriate multiple given the quality of their business.  

 MAR/VAC: VALUE CREATING TRANSACTION - timeshare3

While management wants us to do a sum of the parts where we assign a high multiple to the fee part of their busines, we just don’t see the point since the fees that VAC collects basically equate to the royalty they pay out to MAR – so in our view it’s a wash.  What you are left with is a real estate developer, finance company and rental business - which typically trade at mid to high single digit EBITDA multiples.  There aren't many comps for this business but we would note that the Sunterra multiple included a takeout premium which occurred at the height of the market in 2007 and Bluegreen is a micro-cap stock which recently received an offer to be taken private from Diamond Resorts. 

 

For a vacation ownership business, there are a lot of things we like about VAC’s business:

  • Ability to grow without becoming too asset intensive
  • Seemingly competent management team and Board
  • Reasonable expectations from the outset
  • Opportunity for improvement by selling off excess land in their Luxury segment and de-emphasizing less profitable parts of their business

We are uncertain as to the near term trading, however.  On the negative side, there is a likelihood of technical selling pressure from uninterested funds inheriting this stub and the historical low multiples assigned to timeshare.  However, as we said from the outset, there appears to be a number of sideline sitters awaiting the spin-off to own the hotel company.


Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more