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WYN 3Q CONF CALL NOTES

Takeaway: WYN reported an in-line quarter but performance was driven by timeshare. 2013 guidance was a little better than consensus.

“The third quarter was highlighted by exceptional performance from our Hotel Group.  Our timeshare business delivered another quarter of solid performance and I’m pleased with the ability of our exchange and rentals group to mitigate the impact of economic headwinds in Europe. Our share repurchase program continues to reduce our share count and contribute to strong adjusted EPS growth.” 

 

- Stephen P. Holmes, chairman and CEO

 

CONF CALL NOTES

  • Each of their business units exceeded their expectations. 
  • In the hotel group, fundamentals continue to improve, albeit at a slower pace. RevPAR growth seems to be moderating. However, opportunities seems to be accelerating for them
  • Strong hotel and timeshare growth in Brazil today which presents a great opportunity for WYN
  • Making excellent progress on Apollo.  Relaunching the Wyndham Hotel and Resorts website in August. Room nights from brand.com initiatives are up 17% YoY
  • Exchange and rental business: 4 of 5 of their European business had increases in their transaction volume without significant discounting.  They entered Croatia in 2004 selling just 200 weeks and today they have already sold 30,000 weeks YTD and are the market leader.
  • In August they expanded their vacation rental business in the US by acquiring a business at the entrance of Smoky Mountain Rocky Park
  • Delivered several web enhancements to RCI.com: Chinese website and increased online booking functionality. On track to reduce phone transactions by 30% and have a goal of 40% by 2015.
  • In September they acquired Shell Vacations in WVO: immediately accretive to earnings
  • The demographic for VOI is shifting towards younger and more single owners too.  Median household income: $74k, 68% don't have children, 89% own their homes. 
  • Used the majority of their FCF this year for share repurchases
  • Shell will increase their VOI EBITDA by 10% and expect it to add a few pennies to 2013 EPS.  Unlevered return of 20% above hurdle rate.
  • Excluding higher inter-segment fees, Lodging EBITDA would have increased by 21% YoY. International RevPAR decreased 5% reflecting a mix effect due to growth in Asia which is their lowest absolute RevPAR region due to other international destination.  Compounding this is that their lower end brands like Super 8 are growing faster than their higher end brand.  SS international RevPAR was up 2% in constant currency.
  • 11,500 rooms opened in the quarter - driven by chunky deals like the HPT group
  • Emerging markets account for 28% of the portfolio
  • Exchange and rental business:  both revenue and EBITDA was flat ex. FX. 
  • VOI: VPG increase resulted from better close rates and yield management
    • 20,000 new owners entered the system this year and they are on track to meet their goal of 27,000
    • WAAM 2.0:  reflected sales of a project in Orlando
    • Provision for loan loss reflected higher sales and challenges in porfolio performance due to higher loan balances and fraud that they have already discussed
    • Excluding intersegment fees, EBITDA for the segment would have been up 7% YoY
  • New facility: Overall debt levels are unaffected
  • Expect High single digit EBITDA growth in Lodging and mid-single digit growth in VOI and rental and exchange
  • 4Q guidance:
    • Assumes 143MM shares
    • EPS guidance:
  • Driver guidance: 
    • RevPAR to come in at lower end of guidance
    • Tour and VPG to come in at the higher end of guidance
  • Full 2013 guidance will be given on their Feb call 

Q&A

  •  Upside to FCF go higher due to acquisitions? 
    • Will likely be over $700MM this year and higher next year.  Don't want to create expectations that are too high.
    • All the acquisitions that they have done are FCF positive and should be additive
  • Portfolio issues (VOI): 1) high balance loans tend to have higher default rates- they are tightening underwriting standards which should help in the future on the large balance loan situation. 2) Default fraud activity: bit of a Wack-a-mole issue - but feel like they have addressed the issue and see some improvement in that arena over the next few months
  • Contribution of WAAM 2.0: no margin differential between WAAM 1.0 and 2.0.  WAAM 2.0 is just in time inventory wise. It will be accounted for as gross VOI sales vs. commissions on WAAM 1.0
  • VPG improvement: better close rates and better volumes
  • Shell aquisition did not impact their ability to buyback stock
  • Flow through on timeshare was a little lower than the normal rate/ margin.  Partly due to the higher inter-segment fee and the higher provisions for losses.
  • Provisions on loan losses:  if the remediation plans they have in place work, then there should be some moderation over time. 
  • Inventory didn't decrease because they added some with the acquisition of the Shell business
  • 3Q is a big quarter for lodging bc of strong leisure travel (which is where they are concentrated).  There were some shifts in leisure travel vs. last year but it wasn't massive and it's hard to tell how much of that is due to Apollo. They are getting good feedback from franchisees like - Tripadvisor on their website.
  • HPT was a big driver of room growth QoQ.  Pipeline is down a bit because they had some strong openings in Asia. Also looking at some large conversion opportunities. Even though RevPAR is moderating a bit they see more opportunity to increase their system size.
  • Their RevPAR will start to benefit from their WYN brand growth as well. Thinks that the impact of lower end brand growth in China will start moderating  because they have some full service hotels opening there as well
  • Slower RevPAR growth going forward is due to slightly higher supply growth going forward and that RevPAR has already recovered a lot. 
  • They continue to see a lift in new construction because of their concentration in the economy segment. They have seen a bigger pickup in Urban markets. 
  • Still see a lot of room to keep buying back the stock and that they are nowhere near their intrinistic value
  • WAAM 2.0 going forward:  Don't think that there will be a dramatic ramp up QoQ in 4Q. Have a number of deals that are still in the pipeline. Requirements: desirable location, quality, amenities (basically will their customers find the product attractive). Looked at a 150 deals last year about 50% met the criteria but they only did 2 of them
  • Pacific NW was up about 9% but that has an easy comp in 2011.
  • Mobile is becoming a large portion of the mobile machine. They added an easier click to chat feature on their mobile site. The goal is to make it as easy as possible for customers to book. Lots of customers are driving and looking to book what's closest to them. Likely that the mobile customers are younger. Almost 2/3 of their business is same day. Almost all of their mobile bookings are done within 5 miles of the location.

HIGHLIGHTS FROM THE RELEASE

 

WYN 3Q CONF CALL NOTES - WYNUU

  • In 3Q, WYN "repurchased 2.6 million shares of its common stock for $133 million. From October 1 through October 23, 2012, the Company repurchased an additional 915,000 shares for $49 million. The
    Company has $608 million remaining on its current share repurchase authorization."
  • 3Q12 "included $3 million of acquisition costs, legacy adjustments and debt transaction fees."
  • "Free cash flow was $682 million for the nine months ended September 30, 2012"
  • Logding segment: "The increase primarily reflected RevPAR gains, revenues associated with the Wyndham Grand hotel in Orlando, which opened at the beginning of the fourth quarter of 2011, and higher intersegment licensing fees for use of the Wyndham brand trade name."
  • "Domestic RevPAR increased 5%... Total system-wide RevPAR increased 2%, or 3% in constant currency."
  • "The development pipeline included approximately 950 hotels and 108,300 rooms, of which 55% were new construction and 47% were international."
  • Vacation exchange and rental: "In constant currency and excluding the impact of acquisitions,
    revenues were flat."
  • "In constant currency, exchange revenues were flat, as a 2% decline in the average number of members was offset by a 1% increase in exchange revenue per member. The decline in the average number of members was due to the non-renewal of an affiliation agreement at the beginning of 2012."
  • "In constant currency and excluding acquisitions, vacation rental revenues were flat, reflecting a 3% increase in transaction volume offset by a 2% decrease in the average net price per vacation rental."
  • Increase in vacation ownership: "primarily reflecting increased vacation ownership interest sales."
  • Increase gross VOI sales primarily reflected "a 5% increase in both volume per guest and tour
    flow."
  • Higher VOI EBITDA "primarily reflects the revenue increases, partially offset by higher sales and marketing expenses related to the increase in VOI sales and higher intersegment licensing fees for use of the Wyndham brand trade name."
  • Balance sheet items:
    • Cash: $230MM
    • VOI contract receivables, net: $2.9BN
    • VOI & other inventory: $1.1BN
    • Securitized VOI debt: $1.9BN
    • LT debt: $2.5BN

ENERGY: Counting Rigs

The Marcellus shale is one of Pennsylvania’s natural gas wonders. It’s a massive natural gas play that has the best economics of any gas play in the US and watching the rig count in Pennsylvania can tell you where natural gas is headed. The Marcellus rig count was the last to fall, and will be the first to come back.

 

ENERGY: Counting Rigs  - 1 normal


Remember November

REMEMBER NOVEMBER

 

CLIENT TALKING POINTS

 

YESTERDAY’S PROOF

Our #EarningsSlowing theme kicked into gear yesterday as more companies continued to disappoint on earnings through not beating Street consensus and/or offering lower guidance for the rest of 2012 into 2013. This is one thing that can’t be easily fixed by actions from the Federal Reserve. Thus, investors are realizing how bad things are actually getting out there and that is one of the explanations for yesterday’s sell off. Expect more reports to come in looking less-than-perfect over the remainder of the week.

 

REMEMBER NOVEMBER

With the election less than two weeks away, the polls and major media feedback show that Romney and Obama are tied with Romney making the occasional jump ahead. But the fact of the matter is the race is too close to call right now. There’s still plenty of time for bombshells to come out and hit each candidate hard and Donald Trump may be doing just that today. Just keep in mind that whoever is elected will have a major impact on the market on the long-term side of things.

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                UP

 

U.S. Equities:   Flat

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  DOWN

 

Int'l Currencies: DOWN  

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

BRINKER INTL (EAT)

Remains our top long in casual dining as new sales layers (pizza) and strong-performing remodels (~5% comps) should maintain sales momentum. The company is continuing to enhance returns for shareholders through share buybacks . The stock trades at a discount to DIN (7.7x vs 9.3x EV/EBITDA) and in line with the group at 7.3x.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG            

 

PACCAR (PCAR)

Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

HCA HOLDINGS (HCA)

While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

  • TRADE:  NEUTRAL
  • TREND:  LONG
  • TAIL:      LONG

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“over capitalized over produced and under incomed -too much everything” -@fearlicious

 

 

QUOTE OF THE DAY

“The cure for boredom is curiosity. There is no cure for curiosity.” -Dorothy Parker

                       

 

STAT OF THE DAY

Germany's PMI down in October to 45.7 vs 47.4 last month.


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Materials for today's call: "VIEW FROM THE BATTLEGROUND STATES"

Today at 1:00pm EST the Hedgeye Macro Team and Healthcare Team will be hosting a View From the Battleground States Expert Call. 

 

Materials: View From the Battleground States

Please dial in 5-10 minutes prior to the 1:00pm EST start time using the number provided below:

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 496674#

 

 

"Based on our forecasting model, it becomes clear that the president is in electoral trouble"

-Ken Bickers     

 

Professor Kenneth Bickers of the University of Colorado will be featured on the call. Bickers and his colleague, Michael Berry, have created an economic forecasting model that has accurately predicted the outcome of the last eight presidential elections.

 

Topics will include: 

  • Electoral College vote set-up, impact and the importance of swing states 
  • Discuss Forecasting Model Factors: including state and national unemployment figures and changes in real per capita income
  • Factors that will make this election different 
  • Voter expectations and turn out
  • Economic impacts following the election (healthcare, fiscal cliff) 

Bickers' Background

  • Joined faculty at CU Boulder in 2003
  • Received his Ph.D. from the University of Wisconsin-Madison and his BA from TCU in Fort Worth
  • Published articles in numerous journals, including the American Journal of Political Science, Journal of Politics, Public Choice, Administration and Society, and the Journal of Conflict Resolution
  • Current research includes;
    • The consequences of devolution of federal policy activities to states and local communities
    • Local Government Elections Project, an ongoing investigation of the recruitment and campaigns of local office holders who populate local and state offices
    • Exploration of the relationship between residential mobility and local politics 


269 – 269

“A tie is like kissing your sister.”

-J.C. Humes

 

How about if America woke up on November 7th and “269 – 269” was the headline on the front of major newspapers? The implication would be that the Electoral College was effectively tied.  This is actually a somewhat plausible scenario in 2012.  It could occur with Obama winning all of Kerry’s states from 2004 and adding New Mexico and Ohio.  Currently, both New Mexico and Ohio, albeit marginally, are in the Obama camp.

 

In the event of an Electoral College tie, the decision gets handed to the House of Representatives.  Given that the Republicans hold a majority in the House, Romney would then become the next President.   Just as many moderates think that the Tea Party has hijacked the Republican Party, they would now be arguably the key reason that the Republicans gained the Presidency.  After all, if it weren’t for the Tea Party insurgency (for lack of a better word) in the midterms, the Republicans would likely not currently control the House.

 

Regardless of whether you believe my 269 scenario, it is beyond argument that this race is getting too close to call.  The averages of the major national polls are basically within 0.5 points, favorability ratings of the candidates are basically tied, and neither candidate has a definite edge in the Electoral College. 

 

There are some credible outliers related to predicting the outcome of the election.  One of these is Professor Ken Bickers from the University of Colorado. He has done an analysis that looks at state level economics as a predictor for the Electoral College.  Currently, his analysis suggests that Romney and Ryan may win up to 330 seats.

 

We will be joined by Professor Bickers today at 1pm today for a conference call to discuss his analysis.  For institutional macro subscribers, the materials and dial-in will be circulated this morning.  If you are not an institutional macro subscriber, ping to inquire about access.

 

Politics matters as it relates to future economic policy, so we have been and will continue to focus closely on this election.  In fact, we would postulate that some of the stock market weakness over the last few days, though largely driven by #EarningsSlowing, is being amplified by increasing uncertainty in political outcomes in the United States. 

 

Globally, the bigger concern continues to be tepid economic growth.  This morning HSBC’s flash PMI for China came in at 49.1 versus expectations of 47.9.  Even if marginally better than expected, the number remains below 50.  In Europe the numbers were bleaker as the Eurozone Flash PMI came in at 45.3 versus an estimate of 46.5.  The German IFO business climate indicator also disappointed marginally coming in at 100.0 versus expectations of 101.6.  Not surprisingly, the Euro is weak and Spanish yields are backing up this morning, as result.

 

It is a major policy day today in the United States with an announcement coming from the Federal Reserve.  The FOMC rate decision will be held at 12:30pm today with a Bernanke press conference at 2:15pm. Even though the stock market basically peaked on the day of the last Fed announcement, it is unlikely that even Chairman Bernanke adds more fuel to the fire at this point.  Although if the Fed were to signal they are going to take the money printing press up a gear, that would be the ultimate October surprise.  It may even be bigger news than the October surprise that Donald Trump is purportedly going to reveal on Twitter today. 

 

Our friends at Bespoke Investment Group actually did an interesting analysis looking at the return of the stock market on the days of Fed announcements in this period of zero interest rate policy.  According to their analysis, the SP500 showed a positive return on 21 out of 31 of those days with an average gain of +0.71. 

 

Even as history is a guidepost, we would suggest that investors are getting much better at front running the Fed.  This is actually born out in the numbers as in the last year the return on a Fed day is closer to +0.30.  Yes, this is still a positive return, but only marginally so.  Today the setup seems more poised to disappoint as Chairman Bernanke will likely not have much new positive news on the economy, and is also unlikely to further ease.  But, we’ve been surprised by the Fed before . . .

 

The broader issue with the Fed’s long-term zero interest rate policy is that extreme levels at which certain asset classes are getting priced.  One example is the high yield market.  As one high yield investor emailed me yesterday:

 

“Our basic premise is that there is massive technical support in the search for yield for the broader HY and leverage loan market driving yields to historically tight levels.  There is such appetite in the loan market that terms are reverting back to 2007 peak levels…new issue spreads are being compressed and covenants are being pulled (45% of new issue is now ‘cov-lite’ vs. 10% last year).  To a large extent this has been driven by the return of the clo…back from the dead…or at least from 2007.  CLO issuance will be $40bn this year, which is more than the last 4yrs combined.”

 

Now we aren’t ready to make a big call on high yield market just yet, but the red flags raised above are well worth pointing out.  After all, it’s not a tie if you are long high yield at the top.

 

Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $107.48-110.71, $79.58-80.16, $1.29-1.31, 1.71-1.82%, and 1, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

269 – 269 - Chart of the Day

 

269 – 269 - Virtual Portfolio


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