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
Relying On Old-Fashioned Stock Picking, Lee Ainslie Reports His “Strongest Quarter” Ever
Lee Ainslie's Maverick Fund USA enjoyed its "strongest quarter in the fund's history" during the three months to the end of June. According to a copy of the firm's second-quarter letter to investors, which ValueWalk has been able to review, Maverick Fund USA gained 18% in the second quarter. Following this performance, the fund was Read More
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 associate with RCI, IILG, both or neither. If the developer decides to associate with no one for example, the members likely usually elect a Home Owners Association (HOA) to be in charge of collecting fees. Trading Places is in an ideal place to go after HOA’s and take over the services for property management. This also keeps inventory from going on the secondary market, where the prices are significantly lower. Even though a regular time share averages approximately $20k, on the secondary market time shares might cost only $3k. One reason for the price differential is because the secondary market is unregulated.
If HOA’s are taking inventory, there is the opportunity for Trading Places to manage the inventory, and keep it off the secondary market. This benefits all the parties. 1) The developer does not need to worry about not filling up the inventory that they don’t have to pay for; 2) HOA gets benefit of additional maintenance fees and they owners in good standing; 3) Interval gets new members and fees through Trading Places.
Management has not decided exactly what to do with the cash build-up. In my conversations with the management they were reluctance to give exact details on what the company will do with the cash as the free cash flow increases cash on the balance sheet.
Management did indicate that they might call some senior debt which is currently yielding ~9.5% due in 2016, the company has the option to call $300m of these senior in 2012. It would make a lot of sense
Management stated in the call that at a conference they hosted in October for developers, the tone was much more positive compared to last year’s.
To get into valuation here are some important statistics from the company.
·Data for both segments below:
Low cap-ex $15.2m in FY09. CAGR 11.6% revenue growth from 05-09. EBITDA has increased at CAGR 9.5% from 05-09. However, FCF was 72.2m in FY09, well below its high of $115.3m in 07. This was due to both a decrease in OCF and an increase in capex. However, for the first three Qs of FY10 the company produced FCF of $58.8 compared to $54.6 in Q309.
Revenue in 09 was $405m. Interval provided 85%, and Aston 15% of the revenue. Besides for Aston being a smaller percentage of revenue it seems to be in decline as percentage of revenue. Aston’s percentage of revenue decreased 14.3% y-y, and decreased 48.2% as percentage of EBITDA.
Balance sheet as of Q310 Q309
Cash: $189.1m $153.4m
Debt: $400.1m $402.5m
As evidenced from the data above cash has increased and debt has decreased y-y.
The company stated in the latest call that they voluntarily paid down principal of $10m on their term loan and have now voluntarily pre-paid over $35m, including all scheduled principal payments due through Sep11.
Company operates on a calendar year.
Current share price 15.60 (near 52 week high)
52 Week Range $15.66 – $11.08
Shares Outstanding 57.0m
Shares Outstanding (diluted) 58.0m
Market Cap $890m
EV 1.1B, estimated EV in 2011 is $990m as debt decreases from $160m to $80m and market cap increases to $905m.
*All data includes Aston which was acquired in May 07
All forecasts are based on consensus estimates.
Q110:$113.8m, Q210:$101.6m, Q310:$100.5m, Q410E:$96.5m FY10E:$412.4m
Q111E:$117.0m Q211E:$105.1m, Q311E:$105.4m, FY11:$426.1m
For nine months ended September 30th 10 FCF was $58.8 (OCF: $71.7m- CapEx $12.9m) vs. For nine months ended September 30th 09, FCF was $54.6m (OCF $66.2m- CapEx $11.6m). FCF was much lower in FY08 due mainly to ~$15m in fees for going public. It is likely FCF will get back into the $85-$90m in the near future.
FY08: $145.7m; Interval: $145.1m, Aston $9.5m
FY09:$141.2m; Interval: $143.3m, Aston $5.0m
Q110:$143.8m, Q210:$36.0m, Q310:$34.0m, Q4E10:$29.0m FY10E:$142.9m
Q110:$ 34.8m, Q210:$26.8m, Q310:$24.8m, Q410:$19.8m FY10:$106.2
Q110:$15.4m, Q210: $11.3m, Q310:9.3m, Q410E:$7.1m FY10E $42.9m
Q110: $0.27, Q210:$0.20, Q310:$0.16, Q4E:$0.12 FY10E:$0.75
Q111$0.30, Q211:$0.21, Q311:$0.18, FY11E: $0.82
Valuation: As shown below FCF peaked in FY07 at $115m and for FY09 was $72.m (FCF for nine months ended Sept 30 10 is up 8%). We assume that FCF will migate closer to $85m in FY11. IILG has minimal capex, which is mostly used for IT. Since the company is generating tremendous amounts of free cash flow they are in the process of paying off all amounts of debt. This will result in a lower enterprise value in the future as cash increases and debt decreases.
Current market cap of $950m divided by FCF of $85m yields 11.2% for FY11. For a company with a strong moat like IILG this price seems attractive.
Using EV FY11E of $1.1b divided by FY11E EBITDA of $143m yields 7.6X ratio. If we apply a multiple of 10 (which I think is low for this company) to FY11E EBITDA the stock should be trading at $21 per share.
Strong Management Team w. Long History At Interval: Top management including Craig Nash, Chairman, President and CEO (Joined the company in 1982), Jeanette Marbert, COO (1984) and David Gilbert, EVP of Interval Americas (1987) have gone through a number of economic cycles with the company and should be in a strong position to help navigate ILG through the current recessionary environment.
IILG has a mamangement team with a total of Craig M. Nash has served as chairman, president, and CEO of Interval Leisure Group since its spin-off from IAC Interactive in August 2008.
Prior to his current roles, Nash held a series of increasingly significant positions with Interval, including general counsel and vice president of Regulatory Affairs. Craig joined the company in 1982. Prior to his current position, Nash held the roles of general counsel, VP of Regulatory affairs,
and has served as president of Interval International since 1989.
Nash is a member of ARDA’s board of directors and its Executive Committee. Over the past 25 years, Nash also has been actively involved in the American Resort Development Association (ARDA), the trade organization representing the timeshare industry in the United States. Nash with his 25 years of experience in the industry has shown the ability to navigate the company through tough economic periods, such as the recent financial crisis.
Other top management leaders have been with the company for several decades. Jeanette Marbert the current COO joined the company in 1984. David Gilbert the Executive VP , joined the company in 1987.
Executive compensation appears to be at high, Craig Nash earned $3.5m in 2009. However, in 2009 the Compensation Committee changed the pay structure based, to a total compensation figure, which is based largely on hitting certain EBITDA levels. Subsequantely, the total compensation for the CEO, CFO, and COO have all come down considerably since 2008. The CEO’s salary went down by 63% from 2008 to 2009.
The Board of Directors consists of nine members. The company states that five directors are considered independent are “independent directors” within the meaning of the NASDAQ’s listing standards. However, a brief reading of the biographies of the directors shows that all nine directors worked or continue to work for IILG or parent company IAC. Additionally, Liberty Media Corporation has the right to nominate up to 20% of the directors serving on ILG’s board. Liberty Media Corporation owns 16,643,961 shares, representing 29.2% of O/S. In the recent call management stated that they were unsure on what Liberty Media’s intentions were, and the CFO stated “they haven’t really shared anything with us at this point”. The board structure, and Libery’s large stake in the company are certainly a cause for concern.
Catalyst: While I do not look for catalysts (I think value itself is a catalyst), I believe there is one in this case. Several days ago, Marriott announced plans to spin off their time share division. The company did not release too much details in the latest press release but here are the important facts:
Marriott plans to spin off its timeshare business as a special tax-free dividend into a separate public company in late 2011, company expects to file a Form 10 in 2H11. The two companies will have separate boards and management teams, with the Marriott family holding approximately 21% of each company’s shares. 2010 timeshare segment revenue was approximately $1.5 billion, and at year-end 2010, the company was operating 71 timeshare and fractional resorts with more than 400,000 owners. Bill Marriott stated that the new timeshare company “will be positioned to expand faster over time while Marriott International will further advance its longstanding strategy of separating real estate from management and franchise operations. The spinout will pay franchise fees back to MAR for use of their brands. Stephen P. Weisz, president of Marriott’s timeshare business since 1997 and a 39-year Marriott veteran, will be CEO of the yet-to-be name timeshare spinout. Both stocks will trade on the NYSE.
The spin-off is likely to be good for IILG. FBR noted: “This announcement should be a positive for IILG as we believe a stand-alone Marriott timeshare company will likely spend more on timeshare development than the current structure (IILG benefits from MAR’s timeshare buyers joining Interval International) and a slight positive for WYN as there may be conjecture that WYN will spin-off their timeshare business as well (to which we attach a very low probability).“
Other larger companies with timeshare divisons popped over 6% on the news, however IILG did not budge. IILG is currently only being covered by FBR, and I believe that as the company gets more coverage, investors will realize the instrinsic value of IILG.