In VAC’s first quarter earnings, the company reported flat revenue and a fall in net income from $19 million to $9 million compared to the first quarter of 2011. Low growth was reported in the North America segment, which includes the Caribbean and is by far the largest source of revenue, but was offset by declines in Europe, Asia, and the Luxury segment. The decline in profits was primarily due to higher corporate expenses, possibly associated with becoming an independent public company (as Marriott Vacations Worldwide was a Marriott division in Q1 2011). Marriott Vacations Worldwide Corp also breaks down its revenue by product line, which showed that sales of time shares fell compared to the previous year while rentals rose. These results are consistent with a struggling global economy. While VAC’s customer base is better off financially than the average American- Marriott Worldwide reported an average FICO credit score of 734 among customers who used its financing to buy properties, which is above the U.S. average (said to be somewhere between 650 and 720). The number of people trading down from more traditional vacations to shares is apparently being trumped by the number of people opting out of such large purchases. The growth of rental revenue versus sales revenue also supports this trend.
Marriott Vacations Worldwide Corp’s competitors are generally privately held or are divisions of other public companies, as VAC itself was until recently. Starwood Hotels and Resorts (NYSE:HOT) is primarily a hotel company but has such a division and so can be considered a peer. Its forward P/E of 18.5 is even with VAC’s, even though Starwood has been growing its revenue and earnings compared to a year ago and so far VAC has not. It appears to us that Marriott Vacations Worldwide Corp is not particularly undervalued compared to Starwood Hotels and Resorts. Considered more generally against resort companies, the similarly sized Vail Resorts (NYSE:MTN), which focuses on ski resorts, trades at a much higher forward valuation of 41 times earnings estimates. This is after only growing earnings 4% in its quarter ending April 2012, the quarter which is traditionally the strongest for Vail Resorts Inc’s seasonal business, though it should be noted that the warmth of last winter may have hurt Vail Resorts’ business to a degree that will not be replicated next year.
Given that VAC only became an independent company last fall, there has been little time for hedge funds to build up large positions in the stock. At the end of March, the largest hedge fund holder according to 13F filings was North Run Capital. North Run, managed by Thomas Ellis and Todd Hammer, had bought 1.5 million shares (see the rest of North Run’s portfolio). Given that hedge funds are often interested in spin-offs, it is possible that Citadel’s increased stake will be joined- or has been joined- by more successful investors since March. It should also be noted that Marriott Vacations Worldwide Corp is up nearly 60% since it was spun off, with all of that gain occurring in 2012. VAC’s Q2 earnings will be discussed on Thursday, July 26th, so we might not have to wait long to see if Citadel can turn a profit on its increased investment.
