Description

The market is currently littered with dirt cheap investments.  Nobody wants to touch anything with material consumer exposure.  Add-in spin-off dynamics that have been exacerbated by the recent price-insensitive sell-off, and you’ve got Interval Leisure Group, a leading provider of timeshare exchange services that was spun out of IAC/InterActiveCorp (“IAC”) in August of this year.  The business currently trades for roughly 5x run-rate cash EPS (company has $0.45-$0.50/shr of intangible amortization).  There’s clearly some downside to near-term earnings going forward, but longer-term this is a growth business with virtually all of the largest hotel operators involved at some level in timeshare sales.  5x is cheap for a business with a big slug of recurring revenues, 80%+ renewal rates, 30%+ EBITDA margins, a significant negative working capital cycle (subscription fees collected in front of revenues being booked), and ROEs of roughly 30% (PF for spin-off capital structure).

The Company’s primary service, timeshare exchange, gives its members the right to exchange the use of their timeshare for the use of other timeshares at comparable resorts.  Interval generates revenues through both annual membership fees and transaction fees that are incurred by members each time they elect to do an exchange. Typically, a timeshare developer will automatically enroll a new timeshare purchaser in an exchange program and pay for the initial year of membership.  As such, Interval’s relationships with the timeshare developers are a critical element of its business strategy in order to keep the pipeline of new members filled.  The Company also owns a leading property management company in Hawaii (acquired in 2007) that accounts for about 5% of consolidated EBITDA.

Timeshare exchange is an attractive service for timeshare owners.  In exchange for a modest annual outlay, the timeshare owners effectively free themselves from being locked into the same location year after year.  Timeshare purchasers routinely rank the ability to participate in external exchange programs as one of their top five reasons for purchasing a timeshare.  Scale is important for a timeshare exchange business.  Larger exchanges provide more exchange alternatives for their members, thereby raising their attractiveness to new members and leading to further market share gains.  This dynamic has led to an effective duopoly in the industry, with Interval and its primary competitor, RCI, together controlling market share in excess of 95%.  Interval is about half the size of RCI (2mm members vs. 3.6mm for RCI); however, RCI is owned by Wyndham Corporation which, in addition to operating a timeshare exchange, develops timeshare properties.  As a result, many timeshare developers view Wyndham as a competitor and prefer not to do business with them.  These dynamics have led to stable, long-term relationships between Interval and its timeshare development partners, with Interval’s top 25 developer partners having been affiliated with the Company for an average of 16 years.

Over 80% of Interval’s revenues are recurring in nature, leading to decent visibility.  The timeshare industry has grown at a mid-teens compound annual rate for the last 20 years, and has continued to grow through each economic downturn during that period.  This growth has been driven in large part by Baby Boomers seeking vacation alternatives, as well as new supply generation from increasingly upscale lodging operators like Starwood, Hyatt, Marriott, and Four Seasons.  Interval’s CEO and COO have each been with the Company for roughly 25 years, and have been responsible for its growth and maturation.

Since its spin-off in August, Interval shares have traded down from a high of over $15.00 to the current level of roughly < $6/shr.  Concerns over consumer spending, the difficult market environment, MAR’s recent warning about weak timeshare sales, and heavier than usual post-spin selling due to the complexity of IAC’s 5-way split have all contributed to the decline.  In addition, given the size of the price decline, it is probably likely that the market cap no longer meets minimum threshholds for many of the fund managers that were distributed shares, leading to further forced selling.

At current levels, the business trades for just 5x this year’s earnings.  The Company has been growing the top line in double digits each of the last few years.  Your guess is as good as mine with respect to what the next couple of years hold, but I believe that the Company will continue to generate significant cash through the downturn, and should be poised for a significant upturn when things begin to improve.

Catalyst