Travel+Leisure (TNL): Is This Timeshare Stock A Buy After Dip?

Travel + Leisure Co. (NYSE:TNL) has been dealing with difficulties over the past couple of years, due to COVID-19 pandemic and volatile demand dynamics in the hospitality sector. As the economy reopened so too did Travel + Leisure’s business but things look set to stall again. Investing in timeshare companies at the beginning of a new business cycle can often provide opportunities for significant returns. Timeshares are a highly cyclical industry so it works both ways. In downturns, luxury big-ticket items like timeshares get hit the hardest but the rebrand to Travel + Leisure gave Wyndham Destinations a few new tools to help the company cope during hard times like these. Today we’re going to take a look at some of the latest tools and see how they could be benefiting investors in the near future.

The Product

Travel + Leisure is still a timeshare company, but their unique take on the product differentiates them. Instead of a traditional timeshare, Travel + Leisure sells vacation clubs. Members can design their own vacations and they can use their ownership in a number of ways. It was the iPhone moment for Travel + Leisure. They also still get maintenance fees for their timeshare offerings which is a useful form of passive revenue. This allowed the company to focus on building a strong portfolio instead of purchasing and promoting one select location at a time.

Having a strong hotel portfolio is expensive and creates a huge barrier to entry for competitors as they have to go up against an entire fleet of hotels versus just one attractive location and the TNL portfolio boasts some 245 locations in some of the most attractive locations.

As a result, the value of timeshare stocks depends largely on the diversity of products and locations they offer. Having a deep location catalog makes it harder for competition to poach customers and is a major selling point for new customers. It also gives shareholders confidence in the company’s ability to keep current customers. Travel + Leisure has done well building up its catalog.

Travel + Leisure also has the RCI Exchange that facilitates the trading of timeshare- and it’s one of the world’s largest by volume. They’re essentially a one-stop shop for all things timeshare and it always seems to be involved in any innovative solutions in the space.

Some questions have been raised about the timeshare industry’s ability to attract millennial money, but there are some efforts underway that should help it improve. Travel + Leisure began offering subscription services to millennials who aren’t as likely to commit to a long-term investment. The introduction of Panorama’s subscription services could be pivotal for Travel + Leisure, especially in light of recent competition from Airbnb and other short-term accommodation products. Subscription services could very well end up being the next frontier in the timeshare industry.

Strong Gross Margins Post Recovery

Thanks to an improved value proposition relative to higher hotel prices and strong employment figures, TNL’s future outlook is looking promising.

The company enjoys robust gross margins due to pricing power but they have been declining. The Wyndham Destinations offerings exist at the medium level of the pricing spectrum. Compared to more luxurious offerings like the Marriott Vacations clubs, you’d expect Travel + Leisure’s offerings to have less favorable margins but they actually outperform.

This is really a testament to the organizational efficiency of the leadership team. Prices have been able to balance out the costs, leading to higher revenues. Control over maintenance agreements and a solid commission-based model allow the company to effectively pass on costs to customers.

The recovery has really taken root for the company. EPS trends have been favorable until recently. The company has a cyclical component to revenue and has recently been beating estimates for the most part.

Most notably in their vacation ownership business, the company had an average VPG (volume per guest) of $3,377 in Q1 is higher than ever before for the company and 40% above last year’s numbers. It is also important to remember that inflation is good for their company. Rates for hotels and vacation homes are rising. This helps add value to the timeshare concept for consumers as it becomes more cost-effective relative to staying in other types of accommodations. Interest rates rising on the other hand are more concerning.

Bad Conditions for Cyclical Plays

Reports from the Federal Reserve suggest that we are heading towards rate hikes between 3-5 times this year. This will be the first time rates have increased since the start of the pandemic-induced lockdowns and it could affect economic growth and equity prices. What’s more, there is a tendency in the timeshare industry to finance purchases so a prolonged period of higher rates will increase the overall cost of VO products to the consumer.

Long-term investors who keep their eyes open should have plenty of opportunities if they stay diversified. The market has been getting more volatile as rates rise and things get tenser overseas.

They affect the volatility of stocks and their multiples. When interest rates are high, stocks are less attractive because they offer lower returns.

The hospitality industry is one of the most affected by interest rates because companies tend to have a high debt-to-equity ratio.

This means that when interest rates go up, so does the cost of borrowing money for these companies. This puts timeshare companies in a tough spot. They have to pay more to borrow money because of the interest rates. They tend to avoid this by making relatively stable agreements with fixed rates for revolving lines of credit. This is where Travel + Leisure stands out against its peers. They have virtually no debt and no pressing need for liquidity injections. It is likely that they may secure credit to beef up the balance sheet if the economy was to go south in a big way but the firm has done such a great job managing its liquidity and overall cost of capital that such a move should be quickly forgiven if it were to happen.

There is also the fact that a recession is not all doom and gloom for larger experience players like Travel + Leisure. There is often room for key acquisitions at advantageous prices and Wyndham has done some amazing deals in the past. Travel + Leisure is an outgrowth of the Wyndham brand but it will be interesting to see if they can have similar success in the event of a downturn.

Conclusion

Travel + Leisure is fairly valued right now. We could be going into a major slowdown and they call hospitality a cyclical play for a reason. I’m never going to recommend buying a timeshare stock on the cusp of a recession but there is a lot to love about Travel + Leisure here. The stock has sold off a lot but it could still go lower. I wouldn’t be in a rush to buy just yet but I see no reason why investors should rush to part with their shares at this level. I rate the stock as a Hold.