Marriott: A Timeshare Champion, But Comes at a High Price (NYSE: VAC)

The timeshare industry was one of those massively affected by pandemic restrictions. And even a giant like Marriott Vacations Worldwide Corporation (NYSE:VAC) was no exception. But the company proved why it remained one of the most formidable figures in the world industry. More than two years later, it has returned to pre-pandemic levels. Today, it remains strategic with its operations to cope with macroeconomic volatility and changes in travel trends. Its operations remained fruitful with impressive revenue growth and well-managed margins. Its decent financial position also shows that it can cover its operating capacity. However, it must be cautious given the significant increase in borrowing during interest rate hikes.

Meanwhile, the dividend has been steadily increasing since it resumed its payments. It maintains a decent yield compared to the market average. However, VAC comes at a high share price.

Company performance

The past three years has been disruptive to the timeshare industry. Hotels, resorts and vacation properties were deemed non-essential amid pandemic disruptions. As such, they faced limited operations and demand due to the recession and travel restrictions. Even an established company like Marriott Vacations Worldwide Corporation did not avert the adverse effect. But recovery has been sweet for the company for the next two years.

Operating income for Marriott amounted to 4.66 billion dollars, a growth of 20% year-on-year. Even better, it has already surpassed pre-pandemic levels, showing its continued recovery. It also maintained a solid customer base despite inflationary headwinds. In fact, Marriott had a fruitful 2022 with increased sales. Different companies’ growth drivers must be highlighted.

One of these is the current timeshare renaissance. Let’s face it. Timeshare has always been more popular with Baby Boomers and Gen Xs. The rise of hotel and holiday home booking apps hampered its potential. But now the timeshare industry is making a comeback. In a survey in different parts of the world, Millennials and Gen Zs now make up 57% of timeshare owners. Timeshares continue to evolve to keep up with changing market needs and preferences. For example, revamped points-based systems with increased travel plan flexibility among members. Booking timeshare and arranging everything in one place is already convenient. So members and renters don’t need to check multiple booking sites and systems. This made it a top opportunity for young people. Timeshares are also favorable for those who work remotely. They act as a home away from home, a place to relax without the hassle of hotels and vacation rentals.

Voyages of revenge were also a primary driving force. Although consumer behavior cannot always be quantified, travel interest peaked in 2022 despite inflation. In a examination, travel searches in 2022 exceeded 2019 levels. Even the tourism industry was dealing with labor market bottlenecks due to a massive influx of travelers outnumbering staff. Marriott benefited from this trend, which led to 20,000 new members.

Strategic pricing also helped the company maximize its potential. It worked amid rising prices and travel demand. The effect was more visible in the second half of the year, when prices rose. Operating revenue in the 4th quarter amounted to 1.19 billion dollars, a growth of 8% year-on-year. It was lower than in the 3rd quarter, but it was logical. The third quarter is often peak travel due to seasonal fluctuations. The short-term impact of higher prices was also greater in the quarter. Moderating demand across industries also contributed to the decline from Q3 to Q4. We can see it in the 4Q VPG of $4,088 compared to the 2022 average of $4,421. But overall, VAC’s 2022 performance was robust.

But what made VAC’s performance even better was its success in stabilizing costs and expenses. They increased in proportion to operating income, showing increased efficiency amid inflation. We can also understand that increased prices and demand outweigh the impact of costs and expenses. The operating margin thus reached 17% against 13% in 2019 and 12% in 2021. In the 4th quarter of 2022 it was 17% against 15% in the 4th quarter of 2021.

The company is still a household name, which allows it to expand and capture more customers. Timeshare also sees attractive growth prospects despite the slowing demand for business and leisure travel. VAC can leverage its solid customer base and popularity to maintain its operating capacity. I will discuss several of its potential trends in the next section.

Why Marriott Vacation Worldwide Corporation can remain a solid company this year

Inflationary headwinds remain challenging across industries due to subdued demand. Tourism is no exception as travelers feel the brunt of rising prices. In a study from 2022, over 80% of Millennial and Gen Z travelers said inflation was straining their budget. As such, many people expect an earlier end for revenge trips. Industry performance may be affected as consumers may have to adjust to higher prices.

On a lighter note, most travelers preferred to change their travel plans to shorter and domestic trips. And Q4 2022 had a sprinkling of hope for travel and tourism. We can attribute that to inflation falling to 6.5% as the year ended. In January, it fell further to 6.4 per cent. I expect prices to fall more as the Fed maintains its conservative approach to economic stability. If that continues, timeshares may maintain their current rates and occupancy rates, especially during peak seasons. Timeshare prices rose from $21,455 in 2019 to $24,140 in 2022. Despite this, the occupancy rate increased to 82.6% in 2022, surpassing pre-pandemic levels of 80.8%. Again, Marriott proved its solid positioning given its above market average of 88% and 89%. Even better, a study shows over 80% of travelers plan to spend the same or more on travel and tourism. This is in line with the forecast from The Economist, which showed increased travel spending across regions. That is possible as US inflation continues to ease.

Marriott can keep up with these changes and maintain its capacity with its decent cash position. Its liquidity level is still adequate and increasing while covering operations and liabilities. Still, it has to watch its loans, which are already five times as much as cash. Fortunately, its net debt/EBITDA ratio of 4.1x is still below the peak of 4.5x. It is acceptable for capital intensive companies that may require more financial leverage. Thus, the company still earns enough to cover loans. We can confirm that with its cash flow from operations that can cover CapEx. But the estimated ratio may mean that the company has to limit its borrowings in order to maintain liquidity.

Share price

The stock price of Marriott Vacations Worldwide Corporation rose sharply from 2020 levels. But it slowed down in 2022 when it had corrections. At $154.05, it is only 4% higher than last year’s value. Despite this, the share price does not seem cheap relative to fundamentals. Using the PB Ratio, the company has a BVPS of 66.74 and a PB Ratio of 2.36x. This is far lower than the annual average of 1.92x. If we multiply the current BVPS by the average PB ratio, the target price will be only $128.07.

Meanwhile, dividends have continued to rise since Marriott resumed its payments. Dividend yields are decent at 1.95%, higher than the S&P 400 at 1.5%. These are also well covered considering the Dividend Payout Ratio of 31%. To better assess the share price, we will use the DCF model.

FCFF $410,000,000

Cash $854,000,000

Borrow $5,140,000,000

Perpetual growth rate 4.8%

WACC 9.2%

Outstanding Common Shares 37,481,000

Share price $154.05

Derived value $131.11

The derived value can confirm the assumption of potential overestimation. There could be a 16% decline in the next 12-18 months. So investors should watch out for a potential fall before buying stocks.

Bottom line

Marriott Vacations Worldwide Corporation secures the top position in the industry. That shouldn’t be surprising given its solid performance amid market volatility. It can maintain its capacity with its sufficient cash reserves, although it must work to minimize borrowing. Furthermore, the travel and timeshare market outlook remains sunny despite inflation uncertainty. Meanwhile, dividend payments continue to rise with reasonable yields and payout ratios. But the stock price is too high for its fundamentals. The recommendation is that Marriott Vacations Worldwide Corporation is a team.