I posted this article in part previous on the website, but I did not post the full thing because I gave exclusive rights for the article to Guru Focus. I was given permission to post the full write up here.
Just one note: This article was written before the company announced earnings this week. I did not read the Q, press release or listen to the company call:
This article was posted on GuruFocus as part of the March stock contest. The contest can be found at the following link-http://www.gurufocus.com/news.php?id=119858
Interval Leisure (IILG) is currently trading at $17.00 a share, and offers an attractive valuation based on both qualitative and quantitative factors.
Interval Leisure is a young company, which was spun-off from internet conglomerate IAC in the summer of ’08.
Interval provides membership and leisure services to the vacation industry worldwide. The company operates through two segments, Interval and Aston. Interval to summarize in one sentence; signs up members to give them access to timeshares, and provides an exchange through which time shares with other members.
(For clarity sake when I use the term IILG in this article I am referring to the total company. When I refer to Interval it is specifically the Interval segment and ditto for Aston.)
This is how it works for large developers; Marriott will build a time share resort and sell the units for approximately $20k. This entitles the owner of the time share to have one week a year forever, they can even pass the property down to their children. Marriott has an exclusive agreement with IILG. Marriott will pay the IILG membership for the first year for new buyers and afterwards they will have to pay to be a member of IILG. IILG has exclusive contracts with several other major business, including Hyatt, Starwood, Sheraton and other large resort builders.
Interval charges a fee to join the network which entitles members to a one week vacation timeshare in many of the vacation hot spots in the US and around the world; including Cancun, Hawaii and Orlando. The total network consists of 2,500 resorts in over 75 nations.
For basic membership the cost is $89, and includes extra perks including travel agency services, discounts and more. The membership fee entitles the time share owner to be a member of IILG’s network, consisting of approximately 1.8 million members. It should be noted that the time share business is a duopoly with IILG and Wynn’s RCI unit with 3.8m members controlling 99% of the time share market. ILG has a stronger moat from the two as I explain below.
The main benefit of being a member of the IILG network, is that it allows time members to exchange their time shares with other members. For example if a member has a time share in Florida for one week in January and they cannot make it due to work or other obligations they can exchange time shares with other members. For a fee of $139 online and $159 over the phone, the member will be able to get an equivalent quality time share in Hawaii in May. These fees are far lower than RCI exchange fees, which run closer to $200.
IILG targets quality over quantity and it could increase its network size significantly if management wished to do so. Management does not see itself competing against RCI for total number of members. IILG is more interested in increasing average revenue per member, which has increased from $158 in FY07 to $176 in FY09. The average IILG customer has a medium salary of $103,000 versus ~$80,000 for regular time share owners. Wyndham’s RCI unit is one of three segments of the company. Many time share operators are reluctant to team up with RCI, since Wyndham can decide to use the cash flow coming from RCI for Wyndham’s other two business segments.
The membership fees and exchange fees are the core of the Interval segment’s revenue stream.
One of the main competitive advantages is the large network of members Interval has. Since there are close to two million members in the exchange it is much easier to find another member to exchange with. This creates a powerful barrier to entry since a small time share network cannot offer the same vast exchange opportunities to other members.
One possible misconception about IILG is that it is largely exposed to the Real Estate market However, this is entirely incorrect, as the RE market only effects time share builders. IILG does not buy or sell time shares, they merely facilitate the exchange. Another way to state it, is that IILG acts as a middle man, they are not at risk of any decline in the real estate market.
In addition, most members who paid $20k for a time share are unlikely to forgo the benefits that the IILG exchange network offers for a price of $89. After paying so much for the time share it is worth the $89 to be able to exchange to another location/date if needed. In addition, as mentioned above the average IILG member has an above average income and can more easily afford the yearly membership fee.
Aston is the other segment of IILG. Aston simply does property management of time share properties. They will make sure the grass is cut, plumbing is fixed and all other maintance work is done.
Although Aston produces only a tiny amount of IILG’s revenues, the story of Aston is more complex. Aston was purchased at the height of the housing bubble for approximately $100 million. IILG was hoping that Aston would produce EBITDA of $12m on revenue of $80m. However, then the world fell apart, and Aston is now only earning approximately $4m in EBITDA.
The good news for Aston is that business seems to be picking up. In Q3, IILG had $1.7m in EBITDA $1m being attributed to Aston. Aston reported EBITDA of $2.0m in Q310, an increase of 98.4% from Q309.
Trading Places was acquired in November 2010 by IILG. Trading Places offers both an exchange network and time share ownership management services. Trading Places is similar to both Aston and Interval in that regard. However, Trading Places does not require membership fees for the ability to exchange networks unlike Interval. In addition, Trading Places is tiny compared to Interval; Interval does as much business in a day as Trading Places does all year.
I asked management what was the need to purchase Trading Places when the company can simply use Interval and Aston and offer Interval services to non-members? Management stated that they technically could do almost everything Trading Places does but saw two main reason for the acquisition. Interval has certain legal restrictions against offering exchange services to non-interval members.
More importantly Trading Places has built up a successful albiet small network of members, and fits very well in the IILG business structure.
The real allure is that Trading Places gives IILG the ability to manage more of the unaffiliated time share properties (properties associated neither with IILG nor RCI).
With Trading Places, IILG is able to go after the small resorts. If a small developers builds 30 units he will try to sell it to individuals or RCI/IILG. The developer can decide whether he wants to