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Marriott Vacations Up 30% in 6 Months: Is More Upside Left?

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Marriott Vacations Worldwide Corporation (VAC - Free Report) is riding high on robust top-line growth, digitization and share repurchase program. As a result, shares of the company have gained 30.4% in the past six months, outperforming the industry’s 17.8% growth. However, high debt and expenses remain a concern. Let’s delve deeper.

Hidden Catalysts

Marriott Vacations’ continues to impress investor with robust top-line growth. In first-quarter 2019, revenues increased 85.6%, following an 87.2% gain in the preceding quarter. The upside can be attributed to revenue growth across segments. Also, consolidated Vacation Ownership contract sales, rental, financing and resort management, and other services’ revenues increased 74%, 98%, 89% and 79%, respectively, during the same period. For 2019, the company expects consolidated contract sales to be in the $1,530-$1,600 million range.

Marriott Vacations completed the acquisition of ILG, Inc. — a provider of professionally delivered vacation experiences in September 2018. Post the completion of the acquisition, Marriott Vacations’ pipeline expanded to more than 100 resorts. In 2019, the company expects to realize greater cost synergies from the ILG acquisition. Furthermore, management expects to realize merger cost synergies of $100 million in the long run. Overall, the company expects to realize $35-$40 million in savings during the current year and $50 million synergy run rate at 2019 end.

 

Meanwhile, hoteliers are adopting innovative technological ways to sustain competition and meet the changing nature of consumer demand. Marriott Vacation has also been focusing on digital expansion and innovation of latest techniques. By the end of the third quarter of 2019, the company expects to launch its digital marketing program with Marriott, which will allow users of Marriott.com to receive attractive offers and promotions.

In the first quarter of 2019, the Zacks Rank #3 (Hold) company repurchased 1.2 million shares for $106 million. Marriott Vacations also paid dividend worth $41 million. For 2019, the company expects adjusted free cash flow to be $400-$475 million. Further, it continues to expect cash flow generation in the current year to support future sales growth.

Concerns

Despite cost synergies from the ILG acquisition, the company has been bearing the brunt of high expenses. In 2018, total expenses increased 39.4% year over year due to an increase in the cost of vacation ownership products as well as high rental, financing and administrative costs. Increased marketing and sales expenses along with management and exchange costs too affected total costs. Total expenses in the first quarter amounted to $969 million, up 87.1% year over year.

Moreover, higher debt burden is worrisome. The company’s total net debt outstanding at the end of first quarter was roughly $3.9 billion, consisting primarily of $2.2 billion of corporate debt, most of which resulted from the ILG acquisition and $1.7 billion associated with non-recourse securitize notes receivable. Owing to a higher debt burden, the company might fail to finance the upcoming projects.

Key Picks

Better-ranked stocks worth considering in the same space include Huazhu Group Limited (HTHT - Free Report) , Red Lion Hotels Corporation (RLH - Free Report) and Wyndham Destinations, Inc. (WYND - Free Report) , each carrying a Zacks Rank #2 (Buy).  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Huazhu Group Limited, which was previously known as China Lodging Group Limited, has an impressive long-term earnings growth rate of 20.9%.

Red Lion Hotels’ bottom line for the current year is likely to increase 93.3%.

Wyndham Destinations reported better-than-expected earnings in all of the trailing four quarters, the average being 5.9%.

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