Description

Summary: We believe Marriott Vacations Worldwide Corporation (“VAC”) is an attractive long investment based on the quality of the business, tailwinds from the recently completed merger with ILG, Inc. (“ILG”), and an undemanding valuation.  We believe the stock was a crowded event-driven long going into the merger which didn’t trade well in 4Q18 given its ownership base and confusing investor communications surrounding the integrated financials. We believe this backdrop has created the opportunity. We believe it’s worth +$125/share and has the potential to converge over the next year.

Background:  VAC is a leading timeshare operator with ~650k member families and over 100 resorts.  The company has its origin as part of Marriott International where it leveraged the Marriott hotel brand to sell timeshares at adjacent resorts.  VAC was spun from Marriott International in 2011 and has since operated as a standalone public company with a license to use to the Marriott brand names and an agreement to market vacation ownership products to Marriott hotel guests and reward members.  In April 2018, the company announced a merger with ILG, which operated a timeshare business under the Starwood and Hyatt brands, along with a timeshare exchange and rentals management business. The cash and stock transaction doubled the EBITDA of VAC. ILG had been pressured to sell by activist investors, and a potential transaction with VAC had been specifically anticipated by the market, as VAC was under-levered, looking to consolidate the market, and in a unique position to leverage sales and marketing synergies given the recent merger of Marriott and Starwood hotel companies.

Thesis: Our thesis on VAC is predicated on the following:

(1)   High quality business.  In general, we view timeshare operators as attractive businesses with high returns on capital and strong leverage with members, which facilitates reliable management fee generation and a captive sales and marketing channel. Historically the industry has been resilient to the economic cycle.  While the industry has had problems with aggressive sales practices, we believe VAC has a strong reputation and an up-market and highly satisfied customer base. The Marriott and Starwood brands and rewards programs provide VAC with differentiated customer acquisition opportunities.

(2)   Merger synergies likely to grow.  We believe the $100 million announced cost synergies to be a conservative estimate for what can be achieved.  The company has not yet quantified revenue synergies, but we believe they could be material. We believe the primary revenue synergy drivers will be improved tour flow mix through the introduction of call forwarding (i.e. offering timeshare to hotel customers booking reservations) and resort linkage (i.e. offering vacation ownership tours to nearby hotel guests) at the legacy Starwood operation.  ILG previously did not have call transfer capability at all and had limited resort linkage rights under its agreement with Starwood. These capabilities can now be significantly enhanced under VAC ownership, given its own brand agreement with Marriott and the combination of Marriott and Starwood in 2016. We believe the opportunity here is to converge legacy ILG volume per guest (“VPG”) of ~$3,000 with VAC North American VPG of ~$3,800 over time.

(3)   Undemanding valuation.  The company is attractively priced at ~8.0x EBITDA and ~10% FCF yield with modest leverage of <3.0x.  We believe there is ample room for buybacks and it has recently increased its repurchase program following weak trading of the stock in the fourth quarter.

Valuation

Our base case valuation is ~$125/share, assuming a modest re-rate to 9x on above street estimate for EBITDA19 of ~$800 million.  In our base case, the stock will continue to grow FCF at ~10% y-o-y in addition to trading at a 8% FCF yield, indicating the potential for high-teens returns annually from there.

Catalyst

Catalysts

(i) delivery of integrated financials as a combined company, (ii) delivery of deal synergies, (iii) outperformance of earnings expectations, and (iv) ongoing stock buyback shrinking float.