Marriott Vacations Worldwide Corporation

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Marriott Vacations Worldwide Corporation (VAC) is a global vacation company, primarily focused on providing vacation ownership, exchange, and management services, and a limited inventory of rental properties.

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.

VAC operates in the timeshare industry, which is commonly referred to as “Vacation Ownership.”

Business Overview

VAC operates under the following primary business segments:

  • Vacation Ownership: This segment involves the development, marketing, sale, and financing of vacation ownership products (timeshares) and other related services. They are sold to customers through various distribution channels, including onsite sales, direct sales and telesales.
  • Exchange & Third-Party Management: This segment is focused on exchange and other management services. This segment also provides management services for hotels, resorts, and other properties.

The core business of VAC is vacation ownership and exchange, with a small component of rental properties.

Industry Landscape & Trends The timeshare industry is characterized by:

  • High competition: The market includes traditional players like Wyndham, Hilton, and Hyatt, as well as independent operators.
  • Cyclicality: The industry is sensitive to the overall economy. Consumers are more likely to cut spending on discretionary items like vacations in an economic downturn.
  • Shift towards flexibility: Customers increasingly desire flexible ownership options, rather than fixed units for pre-determined time periods.

What Sets VAC Apart

  • Brand Recognition: VAC benefits from the strong brand recognition of the Marriott name, although that brand is not completely leveraged in the Exchange and Third-Party Management division.
  • Large Scale: Has a large resort system spread all over the world and enjoys a large loyal customer base.
  • Global Reach: VAC has resorts and operations worldwide.
  • Diverse Offering: VAC sells different types of ownership products and exchange programs which helps with multiple customer segments.

Financial Performance

Here’s a breakdown of the company’s financials based on the latest quarterly results:

  • Revenues: The total revenue is comprised of revenue from vacation ownership products, management and exchange services, rentals, financing and other revenue. In Q3 2024 revenues declined to $1.109 billion. We will analyze individual segment numbers below.
    • Vacation ownership revenues were $319 million.
      • This includes sale of ownership product revenue and financing income.
    • Exchange and Third Party Management revenues were $779 million.
      • Primarily a combination of management fees from resort management and exchange fees.
    • Other revenues were $10 million.
  • Expenses: Operating expenses include cost of sales, marketing and sales, financing, general & administrative, depreciation and amortization, impairments, and other expenses. The total costs incurred during the quarter were 1.087 billion dollars.
  • Net Income: VAC reported a net income of $107 million for Q3 2024. The net income attributable to common stockholders for the quarter was $75 million.
  • Earnings Per Share (EPS): The diluted EPS for the quarter was $2.16.

The majority of VAC’s revenue comes from its Exchange and Third-Party Management segment. Revenue from vacation ownership product sales is also significant, and it also has high costs associated with it.

Diving Deeper into Financials

Let’s look at key drivers of value:

  • Return on Invested Capital (ROIC): ROIC is a key measure of how effectively the company uses its capital. While their ROIC is not explicitly mentioned, it can be derived from Net operating profit less adjusted taxes (NOPLAT) divided by Invested Capital, ROIC is important for understanding long-term value creation, and management of capital should prioritize higher ROIC.
  • Growth: Even though management is expecting growth in the future. This is largely dependent on the global economy which is still fragile.
  • Capital Structure: A company’s debt-to-equity ratio is important to consider in evaluating its financial risk and its overall valuation.

Valuation

  • Given the above metrics, a good way to evaluate this would be to calculate discounted cash flow(DCF). And then use the multiple of other similar timeshare companies in an emerging market.

Moat Rating: 3/5 VAC possesses a narrow moat due to a combination of factors:

  • Brand: The Marriott name provides some pricing power. Also, customers have some loyalty to its timeshare offerings.
  • Customer Lock-In: High switching costs, both financial and time, limit movement to competitors. The timeshare ownership is a long-term agreement.
  • Economies of Scale: VAC has a very large resort network which generates huge scale advantages in terms of pricing and operation.
  • Proprietary Technology: The exchange network and timesharing operations are complex and difficult for new companies to replicate.

However, this moat is not overly strong as their revenue growth is not that promising. And they are in a highly volatile and competitive market. The fact that they can generate stable earnings through the multiple revenue streams they have means that their operations have some stability. Therefore, it is a narrow moat, not a wide one. It’s also not a weak moat as the barriers to entry are high, and existing companies are entrenched in their operations.

Risks to the Moat and Business Resilience

  • Economic Downturns: Given the discretionary nature of travel, any major economic downturn could drastically reduce sales of timeshares, putting pressure on both top- and bottom-line figures.
  • Intensifying Competition: Competition could erode revenue growth, and push companies to offer high incentives or discounted pricing plans to generate sales.
  • Regulatory Risks: They are prone to sudden shocks that may occur due to regulatory or policy changes.
  • Increased operating expenses: Significant inflation may cause a spike in costs which would need to be compensated with increased prices, which are not always available.
  • Changing consumer preferences: Younger generations may not find timeshares attractive, making them less appealing to a significant customer base.
  • Technological Disruption: The industry is sensitive to new and more innovative ways to travel, such as through the internet and mobile channels. The business needs to adapt to it or be disrupted by it.
  • Leverage and Debt Load: The company is highly leveraged due to their expansion strategies, especially by acquisitions. Changes in interest rates may put pressure on profits.
  • Acquisition Issues: Integrating acquisitions may prove difficult and costly for the company which can lead to impairments of goodwill.

  • Decline in timeshare sales: Recent data on the market suggests that there has been slowing demand for timeshares in the United States and Europe. This may drastically reduce sales for this sector.

    Business Resilience

    Despite the risks, VAC does have some resilience due to:

  • Recurring revenue streams: A large portion of their revenues comes from management and exchange fees that are not prone to large swings, as compared to volatile timeshare sales, which makes the business comparatively more stable.
  • Diversification of business lines: Having various streams makes the company more resilient to sudden and sharp changes.
  • Established Brand: Brand power, while not a wide moat, provides a reliable competitive edge.
  • Scalability: They do not require massive investments in order to grow as they have already built a lot of infrastructure for their resorts, which could offset some of the risk.

Understandability Rating: 3/5

The business model is somewhat complex to understand, as it involves different ownership products, exchange networks, management contracts, and real-estate properties, etc. It’s not a simple subscription model or a basic product-based business. A thorough understanding of accounting and different metrics is required. While there is a lot of history and reporting to analyze, some elements are difficult to quantify, like the underlying trends of travel and vacation ownership, which require a good understanding of the market. It also requires knowledge of many different industry and accounting specific terms.

Balance Sheet Health Rating: 4/5

  • Debt Levels: The company’s leverage is high relative to its size which means it is susceptible to volatile economic environments and interest changes. A large debt burden would make it more difficult to expand. However, the management has mentioned that it has been focused on deleveraging its balance sheet in the coming years.
  • Cash Flow: The company is able to produce significant cash flows which enables it to make strategic investments, improve its debt situation, and return value to shareholders.
  • Assets and Liabilities: The company has a huge amount of assets, and liabilities are mostly covered by equity.

Overall, the company’s balance sheet is in reasonable health, although the high level of debt brings some risks to operations.

Recent Concerns and Management Views

  • Macroeconomic Factors: High interest rates and economic uncertainty in certain geographies can cause customers to postpone their purchase or refrain from taking vacations which can significantly affect company’s financials. However, management believes their business model is resilient enough to overcome these challenges and it will continue to generate high long-term value.
  • Inflation: Management admitted that inflation had increased expenses but also increased pricing in response, so while the higher input costs have decreased profitability to some extent, company expects it to be temporary.
  • Exchange Rates: Fluctuations in currency exchange rates may cause volatility in the company’s revenues in certain areas, especially when those are large operations for the company, and management has said that this is not a major problem and they can mitigate this risk.

The management team seem to be confident in the company’s long-term prospects as it is a capital-intensive business with long-term growth potential. It’s also worth mentioning the company has been improving and has a long history of operational efficiency and generating cash.