Wyndham Worldwide Corp. [WYN]
Price $26, Mkt Cap $4.8b
Wyndham is a hotel/vacation industry business with over 2/3 of its EBITDA derived from recurring and growing revenue streams [“fee for service”]. With a shift toward having over 90% of revenue derived from its fee for service business model, the company is now generating and will continue to generate $500MM to $600MM in FCF on a $4.8B market cap. As a market leader in oligopolistic sectors of the lodging industry, WYN is well positioned to build on this core earnings power. WYN is investment grade according to S&P and currently trades at 11% FCF yield. Given the large discount to its peers (10.2x EBITDA vs. a blended average of 14.6x for peers), the company has the potential to gain a greater multiple if it executes on its strategy. More reasonable FCF and EBITDA multiples would suggest a valuation 50+% higher than current levels.
o WYN has a large amount of debt
o WYN will return to its asset intensive business model
o Lodging remains a difficult industry and will not materially improve o If the company exits the financing market, its financing fees will materially decline
o While debt level looks high, S&P has rated WYN investment grade. Moody's will likely upgrade one notch when WYN removes one facility. The EBITDA from the hotel and exchange businesses alone more than covers the entire interest by over 4x. The company has very abundant cash flows to service its debt. o We have had several meetings with management and we think the company has made an irrevocable turn towards managing the timeshare business to driving free cash. This was repeatedly reiterated to us by the new CFO as well as the CFO of the Timeshare business. o Industry lodging stats have clearly begun to bottom and RevPAR comps are poised to turn positive. WYN's business, which is based on franchising, was much more resilient than the hotel management models of HOT and MAR. o WYN has already survived the worst financing market since the depression. The company has taken out enormous costs and is no longer chewing up capital. The financing situation for timeshare is likely to improve from here, with advance rates going higher, not lower. That will be very positive for WYN free cash.
o Potential for a ratings upgrade to investment grade by Moody’s o Potential for a large reauthorization of the share repurchase – in Jan ’10 resumed share repurchase program, with $157m remaining under current authorization o Potential for an obviously accretive acquisition
o Execution of the company’s “asset light” strategy would lead to $500-600 million of cash per annum.
o A double dip could lead them to suffer deterioration in business conditions o Company still has a large amount of leverage
o Asset backed market could dry up
o Management could misallocate capital (we think this is unlikely because they are leery of doing any “transformational” acquisitions, and would prefer to focus on “tuck-ins” that yield a 20% pre tax rate of return).
o Market leader in each of its three businesses
• Lodging – 18% of sales, 23% of EBITDA
• World largest franchisor – 600k rooms, 7k hotels, >20 brands • More resilient mid-scale and economy brand portfolio • 100% franchised – fee-for-service model
• Exchange & Rentals – 30% of sales, 32% of EBITDA • One of two vacation exchange companies – has 2/3 of the market • Fixed membership base – 3.8m members and >4k affiliated resorts • Largest EU rental broker with >60k properties • Commission based business model
• Growing rental business in int’l markets
• Vacation Ownership (Timeshare) – 52% of sales, 45% of EBITDA • World largest...