Travel + Leisure Company (New York Stock Exchange: TNL) has dealt with difficulties over the past two years, due to the COVID-19 pandemic and the fluctuating demand dynamics in the hospitality sector. As the economy reopens, so does Travel + Leisure’s But it seems that things will stop again. Investing in timeshare companies at the start of a new business cycle often provides opportunities for significant returns. Timeshare is a very cyclical industry so it works both ways. In downturns, big-ticket luxury items like timeshare take a hit, but bringing the brand back into Travel + Leisure has given Wyndham Destinations some new tools to help the company weather such tough times. Today we will take a look at some of the latest tools and see how they can benefit investors in the near future.
Travel + Leisure is still a timeshare company, but its unique approach to the product sets it apart. Instead of traditional timeshares, Travel + Leisure sells vacation clubs. Members can design their own holidays and can use their property in many ways. That was the Travel + Entertainment moment on the iPhone. They also still get a maintenance fee for their timeshare offers which is a useful form of passive revenue. This allowed the company to focus on building a strong portfolio rather than buying and promoting one specific site at a time.
Having a strong hotel group is costly and creates a huge barrier to entry for competitors as they have to face an entire fleet of hotels against one attractive location, TNL Group has around 245 locations in some of the most attractive locations.
As a result, the value of your timeshare inventory depends largely on the variety of products and locations you offer. Having a deep site catalog makes it difficult for the competition to attract customers and is a major selling point for new customers. It also gives shareholders confidence in the company’s ability to retain existing customers. Travel + Leisure did a good job building their catalog.
Travel + Leisure also has an RCI Exchange that facilitates timeshare trading – one of the largest in the world by volume. They are basically a one-stop shop for all things time sharing and they always seem to be involved in any innovative solutions in the space.
Some questions have been raised about the timeshare industry’s ability to attract millennium money, but there are some efforts underway that should help improve it. Travel + Leisure has begun offering subscription services to millennials who are unlikely to commit to a long-term investment. Offering subscription services to Panorama may be pivotal to Travel + Leisure, particularly in light of recent competition from Airbnb and other short-term accommodation products. Subscription services could end up becoming the next frontier in the timeshare industry.
Strong Gross Margins After Redemption
With an improved value proposition relative to higher hotel rates and strong employment numbers, TNL’s future outlook looks promising.
The company has strong gross margins due to pricing strength but they are declining. Wyndham Destinations offers are at a mid-level of the pricing range. Compared to more luxurious offerings such as Marriott Vacation Clubs, you’d expect Travel + Leisure offerings to have less favorable margins but they actually outperform.
This is really a testament to the organizational competence of the leadership team. Prices managed to balance costs, which increased revenue. Control of maintenance agreements and a robust commission-based model allows the company to effectively transfer costs to customers.
The recovery has really taken root for the company. EPS trends have been favorable until recently. The company has a cyclical component of revenue and has lately been beating estimates for the most part.
Especially in the vacation ownership space, the company had an average VPG (Volume Per Guest) of $3,377 in the first quarter which is higher than ever for the company and 40% higher than last year’s numbers. It’s also important to remember that inflation is good for their company. Prices for hotels and vacation homes are rising. This helps add value to the timeshare concept for consumers as it becomes more cost effective compared to staying in other types of accommodation. Higher interest rates on the other hand is more worrying.
Bad conditions for periodic plays
Reports from the Federal Reserve indicate that we are heading for 3-5 rate hikes this year. It will be the first time rates have risen since the pandemic-induced shutdowns began and could affect economic growth and stock prices. Moreover, there is a trend in the timeshare industry to finance purchases, so a prolonged period of higher rates will increase the total cost of VO products to the consumer.
Long-term investors who keep their eyes open should have plenty of opportunity if they remain diversified. The market has been more volatile with prices rising and things getting tense abroad.
They affect stock volatility and its multiples. When interest rates are high, stocks are less attractive because they offer lower returns.
The hospitality industry is one of the sectors most affected by interest rates because companies tend to have a high debt-to-equity ratio.
This means that when interest rates rise, so does the cost of borrowing money for these companies. This puts timeshare companies in a difficult position. They have to pay more to borrow money because of the interest rates. They tend to avoid this by having relatively stable agreements at fixed rates for revolving lines of credit. This is where Travel + Leisure stands out against its peers. They have almost no debt and no urgent need to inject liquidity. It’s possible that they might secure balance-sheet bolster credit if the economy is to go south in a big way, but the company has done such a great job of managing liquidity and the overall cost of capital that such a move must be tolerated quickly if it were to happen.
There’s also the fact that economic stagnation isn’t all that bleak for more experienced players like Travel + Leisure. There is often room for major acquisitions at bargain prices and Wyndham has made some amazing deals in the past. Travel + Leisure is an outgrowth of the Wyndham brand, but it will be interesting to see if they can achieve similar success in the event of an economic downturn.
Travel + Leisure is much appreciated right now. We could be in for a bit of a slowdown and they’re calling hospitality a periodic game for a reason. I would never recommend buying timeshare stocks on the cusp of a recession, but there’s a lot to love about Travel + Leisure here. The stock has sold a lot but could still go down. I wouldn’t be in a rush to buy just yet, but I don’t see any reason for investors to dump their shares at this level. I rate the stock as Catch.