Diamond Resorts Cheap Vs Comps, Catalysts Ahead

Chris Colvin, Freeman Group:  Diamond Resorts (DRII): Trades for less than 10x FCF despite a large, growing & recurring profit stream

By Harvest Exchange

It went public a year ago, so it’s a new name to the investment community. The basic thesis is that the company is cheap (trades at a ~11% FCF yield vs. ~8% for its peers) despite an attractive cash flow profile (~45% from evergreen contracts), plenty of room for growth (~doubled EBITDA last year and market still very fragmented), and an experienced team that owns nearly half the stock. I expect them to announce a share buyback or large dividend before year end that should provide a catalyst.

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Investment thesis: Diamond Resorts

  • Diamond Resorts International Inc (NYSE:DRII) is a hospitality company that manages 93 resorts worldwide, sells vacation ownership interests (VOIs or timeshares) that provide access to a network of 300+ resorts, and offers financing to consumers purchasing these VOIs
  • Essentially, evergreen cost-plus management fees represent ~45% of profits and provide predictable growth, while the ~55% of earnings derived from the sale of VOI & related consumer financing has nearly doubled each of the last two years and has substantial room for growth because industry volumes are still well below their peak and the timeshares market is both fragmented & underpenetrated
  • Unlike its peers relying on new developments to drive growth, Diamond Resorts International Inc (NYSE:DRII) utilizes an asset-light business model that effectively enables it to replenish inventory for ~20% of the cost to develop and sell it for ~15x to earn a high ROIC
  • It’s led by an experienced team that has proven it can executed after successfully rebuilding the company despite purchasing it (with funding from George Soros) shortly before the credit crisis ignited
  • And they’re heavily incentivized to continue growing the business with 43% of the shares outstanding
  • Despite these attractive investment attributes, Diamond Resorts International Inc (NYSE:DRII) trades for less than 10x pro forma run-rate FCF compared to 13x for its competitors

Diamond Resorts International Inc (DRII) Trades for less than 10x FCF by Harvest