By guest author Spencer Jakab from the Wall Street Journal.
August 21, 2023
By guest author Spencer Jakab from the Wall Street Journal
Wall Street Journal Logo
August 21, 2023
Every year, The Wall Street Journal’s Heard on the Street columnists pick the stocks they love and loathe and track them for the next 12 months. Heard editor Spencer Jakab kicks off the 7th annual competition.
Related Video
This column is part of the seventh annual Heard on the Street stock-picking contest.
Peruse the annual report of one of the world’s largest timeshare operators and the word “timeshare” appears only 25 times. “Resort” and “vacation” show up 373 and 1,026 times, respectively.
Marriott Vacations Worldwide VAC -1.34%decrease; red down pointing triangle
is an odd bird. Despite sharing a name, it hasn’t been part of the Marriott hotel chain since 2011. Back then, the unit was sagging financially and its industry had a decidedly mixed reputation, often courtesy of small operators whose customers were left paying fees on worthless vacation weeks.
But investors who held on to the stock received through a tax-free dividend made a 1,000% return in the first 10 years. A change Marriott Vacations was implementing at the time has made that possible and left customers mostly satisfied too.
Its shares are in the doldrums now, though, flirting with a 52-week low at a price the stock first hit in 2017. It is getting harder to sign up new vacation owners: Volume per guest—the amount it takes in per tour—slipped to USD 3968 in the second quarter, down 14 % year on year.
Just like in the old days, guests are given discounted resort stays or other inducements to hear a presentation—but salespeople now try to sell points, not weeks. The points give members an interest in a land trust good for stays of various lengths and quality at its 120-plus resorts. The minimum number that one can buy directly from Marriott costs about $25,500. The company does about 400,000 fairly costly tours a year and—unsurprisingly, with inflation and interest rates rising—fewer fish are biting.
What investors might not appreciate, though, is how much sturdier the company’s business is today than during the 2007-2009 recession.
“I would argue the product we’re selling now should be more resilient,” said Chief Executive John Geller in an interview.
Marriott charges fees for managing timeshare properties. Photo: Svet Jacqueline/Zuma Press
Marriott doesn’t own the resorts, but it receives fees for managing them that don’t depend on occupancy. And failure by owners to pay the maintenance fees that keep the resorts running results in either the owners’ association or the parent company getting the legacy week or points that back it. Other customers voluntarily sell their weeks or points back to Marriott, though frequently for less than they paid. Those weeks create more supply of vacation days for current and future point owners.
Marriott therefore can sell points a lot faster than it has to grow its physical footprint through construction or buying other resorts. A surprising amount of what it sells is “recycled” from existing customers at extremely favourable rates. Every year, Marriott spends USD 80 million to USD 90 million on weeks or points that it then resells for about USD 1 billion, according to Geller.
That doesn’t include people who defaulted on loans originated by Marriott—a separate profit center for the company. It periodically sells packages of loans to investors and then buys back defaulted notes at par, effectively paying about 55 cents or 60 cents on the dollar for their vacation purchases. In 2022, 54 % of its timeshare buyers used financing with an average loan of USD 28400, an average term of 12 years and an average interest rate of 13.4 %.
A serious economic slowdown would hurt its middle-class customers, but it also would stimulate supply without the need to build anything. In the temporary absence of enough buyers, those units can be rented out as extra-spacious hotel rooms, often through the former hotel parent company’s reservation system. The sale of new units makes up only about half of Marriott’s earnings before interest, taxes, depreciation and amortization. In addition to financing, rental and management, it makes money when customers use its system to exchange weeks for vacations outside its brands.
A downturn would hurt, but it would pinch weaker competitors’ ability to offer inducements more than it would Marriott Vacations.
“Marriott’s a different animal,” says Joseph Takacs, a broker for timeshare exchange site RedWeek. “They have the ability to pay for those dinners.”
The company also might face less competition from its own customers under the points system than under deeded weeks because it retains more control, artificially buoying the price and earning money from the secondary market. A recent inquiry to purchase 1,000 points on RedWeek for $3 apiece looks much cheaper than Marriott’s price at a sales presentation. But Marriott charges an additional $3 per point transfer fee, a USD 95 right of first refusal waiver fee and a USD 300 education fee, unless the buyer is already in the system.
Analysts have chopped their earnings-per-share forecasts for 2023 and 2024 following the recent sales weakness. At 10.6 times forward consensus earnings, though, the stock is now at more than a 40 % discount to where it traded on average before the pandemic. And while volume per guest has sagged, it shows that Marriott is about as efficient at converting sales as before the pandemic.
Every year, The Wall Street Journal’s Heard on the Street The columnists pick the stocks they love and loathe and track them for the next 12 months. Heard editor Spencer Jakab kicks off the 7th annual competition.
Related Video
This column is part of the seventh annual Heard on the Street stock-picking contest.
as before the pandemic.