3 Cash Cow Stocks to Buy: Timeshare Stocks

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Imagine this: You go to a bank and borrow money to build a big resort with lots of condos or bungalows or hotel rooms. You draw down your credit facility at 6% or so. You then get to build all those structures … and sell each of them fifty-two times!

Cash

Even better, some of your buyers may finance them at 13%, giving you additional profit by playing that mortgage arbitrage. Oh, and you get to collect money for all the services you provide in these vacation structures — food, telephone, laundry service, etc.

Welcome to the world of timeshare stocks. Once, this sector was thought of as sleazy. Today, now that all the big timeshare companies have been purchased by big hotel chains and spun-off, they have enjoyed newfound optics. It’s a lot nicer to call something the Ritz-Carlton Destination Club than “Bob’s Cabo San Lucas Timeshare.”

So, which timeshare stocks are the ones to buy? Read on.

Marriott Vacations Worldwide (VAC)

Marriott International (NYSE: MAR)Marriott Vacations Worldwide (VAC) is a great starting point for timeshare stocks. It holds 62 properties made up of 12,829 villas, held by 420,000 customers across the U.S. and nine other countries.

VAC stock was spun off from its parent in 2011, and has tripled since then. The company was well-capitalized, only carrying about $750 million in debt at about a 6% carrying rate. That debt is offset by $286 million in cash. Of course, the beauty of a timeshare investment is that they require some capex to keep the properties up to date, but that is more than offset by robust cash flow from the continual influx of payments.

The company had FCF of $140 million in FY13. Long-term EPS projections are at 15%. FY14 earnings are pegged at $2.61, so the $52.71 stock trades at 20x earnings. So, VAC is a bit pricey, but it’s still a great buy for anyone considering timeshare stocks.

Diamond Resorts International (DRII)

Diamond Resorts International DRII 185Diamond Resorts International (DRII) has an broad property base for a timeshare stock. It boasts 490,000 owners across a network of 300 vacation sites in 33 countries including the U.S., Canada, Mexico, the Caribbean, Central America, South America, Europe, Asia, Australia and Africa.

DRII stocks also has a resort network of 92 properties consisting of 9,000 units that it manages, along with another 210 affiliated resorts and hotels and four cruise itineraries. So it generates its income in more diverse ways than Marriott.

DRII stock hit the market just last year at $16.15 and now trades above $20. Only 3 analysts follow it, and earnings estimates aren’t spectacular. FY14 earnings are expected to be 92 cents, down from 96 in FY13 — but they’re also supposed to rise to $1.06 in FY15. The problem with Diamond is its debt structure. It paid $88 million on its $414 million in long-term debt last year. If it gets its interest payments refinanced, it’s worth a look because revenue growth is strong.

Interval Leisure Group (IILG)

Interval Leisure Group IILG 185Interval Leisure Group (IILG) feels to me like it has been bought and sold many times, probably because it’s one of the oldest timeshare stocks, founded in 1976. Its 2,900 resorts are spread across 16 nations, with more than 2 million owners. It also diversifies its revenue stream by selling ownerships, and by managing and renting properties. Virtually ever major hotel chain is partnered with it.

IILG has $56 million in cash and $253 million in long-term debt at a very advantageous carrying rate of about 3%. FCF is consistent, thanks to low capex — between $65 million and $85 million annually. Analysts are expecting 15% earnings growth annually over five years.

I think, given the circumstances, that you go with Interval, because it has the longest history. Still, Marriott has more growth prospects in the near term, so that’s another choice that you can’t go wrong with.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at pdlcapital66@gmail.com and follow his tweets at @ichabodscranium.


Article printed from InvestorPlace Media, https://investorplace.com/2014/05/timeshare-stocks-to-buy/.

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