Travel + Leisure Co.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Travel + Leisure Co. operates as a leading membership and travel company, primarily offering vacation ownership and timeshare services, including a points-based system that provides access to resorts and travel.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

The company’s moat rating is 2 out of 5, indicating a weak but potentially developing moat, primarily based on brand recognition and the loyalty of its customer base within the vacation ownership market. While the company has a well-established brand and a sizable network of timeshare resorts, the industry faces notable competition and is affected by economic cycles and shifts in travel trends. This creates vulnerability and prevents them from receiving premium pricing from competitors.

Business Overview:

  • Revenue Distribution: TNL operates through two primary segments: Vacation Ownership and Travel and Membership.
    • Vacation Ownership: This segment, which accounts for the majority of revenue, involves the sale of vacation ownership interests, including the purchase of VOIs (vacation ownership interests), which entitles the owner to use resorts and other accommodations for a designated time and are recorded on the balance sheet as a contract liability. This segment also includes related services like property management and financing of purchases for the company’s customers.
    • Travel and Membership: This segment provides access to exchange networks, travel technology platforms, travel memberships, and subscription services. This segment includes credit card exchange, which acts as a financial platform for purchases made by their customers, and may have cyclical revenue tied to credit cycles.
    • It’s important to note the seasonality of the business, with higher revenues seen in the spring and summer seasons.
  • Industry Trends:
    • The vacation ownership and hospitality market has shown consistent growth, with trends in experiences over material items.
    • Consumers are increasingly seeking convenient and flexible vacation options.
    • The emergence of digital platforms for booking and managing vacations increases competition, but also presents new avenues for growth.
    • The travel market has recovered from 2020 pandemic and has been consistently growing during the last few years.
  • Margins: While the company reports strong overall revenues and profits, the margins differ significantly among its business units.
    • The Vacation Ownership business typically commands higher margins due to recurring fees, financing of purchases, and property management.
    • Travel and Membership, however, may face pressures on its margins due to fluctuations in the travel industry and competition.
  • Competitive Landscape:
    • The company operates in a highly competitive market, with multiple competitors ranging from large hotel chains that offer timeshare options to independent providers of hospitality and travel services.
  • Strong brand loyalty, and the ability to create a strong network are the main challenges for competitors.
  • The industry may face intense competition from third party companies that do not own the physical real estate, but only the software and technology that enables the rental of those properties.
  • What Makes TNL Different: TNL differentiates itself by offering a robust vacation ownership program with a strong emphasis on membership benefits. Through various tie-ins, the company gives its customers an exchange program allowing access to multiple destinations and resorts, and the customer has greater flexibility over their vacation plans. However the company may fall behind in the area of technology as its primary business is not developing proprietary software.

Financials Analysis:

  • Revenues and Profitability: TNL demonstrates solid revenue streams through a wide range of different products in its portfolio. In the latest three month earnings release the company reports a total revenue of $801 million which is slightly down in comparison to the 9 month value of the same period as 2022.

    • The vacation ownership business is significantly more profitable than the travel and membership segment. However, the travel and membership has the highest revenue generation, and it has the possibility of generating high profit margins in the future if a stronger customer base is built.
  • Free Cash Flow: Free cash flow for the company for the last 9 months has dropped drastically from 176 million down to 31 million. Further analysis of the cash flow statement shows that operating activities and net cash provided by operating activities are still a strong source of income. However, the company invested heavily in investing activities and capital expenditures. It is important to note, however, that some of those cash flow deficits are directly tied to inventory.
  • Capital Structure: The company has a leverage ratio of 2.2, which may be higher than its peers. They have a high amount of long term debt, including securitized debt, but they have also made progress in recent years to reduce the debt.
  • Recent Challenges:
    • The COVID-19 pandemic severely impacted the travel industry and, therefore, TNL. While the company’s sales are now recovered, a few years of recovery are still needed to reach their pre pandemic levels. As seen in past earnings releases, the travel and membership segment was very hard hit as customers did not travel, although the vacation ownership segments have been more resilient.
    • The latest earnings calls shows that higher interest rates are creating headwinds for the business and may have a significant impact on the customer base.
    • High amounts of restructuring and legal fees have eaten up into company’s operating profit and free cash flow. These were brought up by the CFO on the latest earnings call, and is a matter of concern for investors.
    • Recent acquisitions could also pose difficulties for management to properly integrate and streamline business segments to fully take advantage of synergies.

TNL is focusing on long term value creation by reinvesting back into the business, cutting down on costs and increasing efficiency. However, it remains unclear how effective that will be in the long term.

Balance Sheet Health: The balance sheet health is rated a 4 out of 5. The company has a good amount of cash and investments to back up its business, but also has a high level of debt, though they seem to be managing the level of debt well. This does affect its free cash flow, though.

Understandability: The company has been rated a 3 out of 5 for understandability. The basic business model is fairly easy to understand, providing timeshare and related services, however, its complicated financial structure, especially with securitized debt, makes fully understanding its financial situation a challenge for new investors.