The U.S. ISM manufacturing PMI has been in a downtrend for the last year, and this week it fell below the key 50 level for the first time since August 2016. In this week’s piece we examine the implications for our coverage by looking at industry stock returns over the last 25 years in relation to when PMI drops below 50 as well as when PMI eventually bottoms.
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Current reports indicate Hurricane Dorian is strengthening and could make landfall in Florida as a Category 3 storm on Sunday.
Resort fees are additional charges outside of advertised room rates (for access to the gym, pool, internet, etc.), which have been gaining more attention following criticism from consumers, OTAs, and some regulators. In this note we discuss the key issues and the financial impact to our coverage.
News reports this week (8/19-8/23) indicated Apollo’s interest in acquiring HGV, which we discussed here. This followed a recent 13F disclosure of a 4.5% stake by Centerbridge, which sparked investor speculation and may have forced Apollo to get the ball rolling, and it’s possible we could see interest from others begin to emerge, too. The chances of an HGV buyout have increased, though there are still some hurdles to overcome, like HLT sign-off and HGV management/shareholder sign-off on the right price. Ultimately, we believe these developments are positive for the group, even if nothing ends up happening, because this may have helped turn sentiment and put a floor in valuation knowing there may be large potential buyers at these distressed valuations (e.g. timeshare was down less than our coverage and the market on Friday’s sell off).
We’ve taken a fresh look at our assumptions for each company now that 2Q earnings season has been digested. Some estimates come up, some come down, and some don’t move as we just changed some of the assumptions with various offsets. Each is detailed below.
VAC is hosting an analyst day on October 4, which we think could be a catalyst for the stock, which is trading at a depressed valuation. We have found historically stocks tend to outperform in the months leading up to investor events, and we would buy the stock now.
Timeshare stocks were under pressure last week after earnings reports. Each of the three missed contract sales expectations in 2Q and each guided/talked down contract sales for the full year for various idiosyncratic reasons, but VAC and WYND still reiterated FY EBITDA guidance. Importantly, we do not believe the lower contract sales is demand related. We believe demand concerns were part of the further weakness in the stocks on Friday. However, to us it seems each case was unique and one-time in nature. Additionally, we think industry contract sales will still grow 5% in 2019, despite some of these non-demand related issues, and we think that growth could accelerate in 2020. We’ll discuss our thoughts with several charts. We continue to favor VAC, which is our top idea in our coverage, and we think their upcoming analyst day will provide a near-term catalyst for the stock. We’d buy the pullback now. Please click the link above for the full report.
VAC reported 2Q yesterday afternoon (7/31/19) and hosted their call this morning (8/1/19). They beat the quarter on the cost side, reiterated the midpoint of FY EBITDA guidance while raising free cash flow guidance, but contract sales guidance was lower.
. VAC reported 2Q earnings after the close (call tomorrow). Adjusted EBITDA of $195M beat consensus of $183M and our $181M estimate. VAC missed us slightly on contract sales but beat us meaningfully on the development margin side. The guidance was mixed, with no change to EBITDA, higher free cash flow, but worse contract sales. VAC gave no explanations and didn’t share much with us post report. The call is tomorrow before the market opens, which is good because this report raises many questions that we think have answers. Importantly, the crux of our thesis – buybacks – is playing out. VAC continues to aggressively return capital, and even with lower contract sales guidance VAC is proving they can still raise free cash flow guidance, as the business seems more stable than perceived.
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