Firm notes their recent meeting with management suggests a focus on 1) shifting the company to a recurring and high margin business model; 2) selling off existing timeshare inventory; and 3) managing the selling process for distressed timeshare, condos, and apartments as timeshare weeks without taking on capital exposure. Over the next several quarters they expect Wyndham to continue to push itself towards becoming a fee for service company while in the meantime, generating significant cash flow as it moderates its timeshare development activities.
As WYN continues to surpass earnings estimates and transition towards becoming more fee driven, they expect investors will give the company credit for the strong assets on its balance sheet and more fully value the shares. In Goldman's view, investors may not be applying high enough multiples to these segments given their individual intrinsic value and sustainability of earnings; however, as these divisions demonstrate more consistent performance, they expect a revaluation. In addition, firm's new analysis on the timeshare segment suggests significant “hidden” value exists. Although the value of timeshare may be debated given the current trajectory, they expect less debate as to the significant cash flow to be harvested from past investments in this segment.
In Goldman's view, Wyndham’s timeshare segment appears to the most underappreciated of the three. Rather than use their traditional EV/EBITDA approach to value this segment, they undertook a discounted cash flow assuming it will complete its construction in process but will not begin any new projects. Firm estimates that even if Wyndham does not commence any more timeshare projects and sales continue at current levels, Wyndham’s equity could be worth $26 share in 12 months.
Significant FCF over the next several years
As Wyndham continues to invest less in timeshare Goldman expects that its free cash flow should pickup significantly over the next several years. While they assume that Wyndham will not exit the timeshare business, it currently has enough inventory to sell for the next five years at current sales rates, thus they do not anticipate the company will need to spend on new inventory until 2011 or even beyond. This could create a period of several years where the company generates several hundred million dollars of free cash annually.
Wyndham is trading at only 3.2X 2011 EV/EBITDA vs. the lodging sector of 8.9X. Goldman expects these two numbers will converge as they do not anticipate any need to further lower guidance and in fact, Wyndham could consistently beat estimates.
Notablecalls: I expect WYN to trade over the $17 level today with $18 not out of the question.
- Goldman Sachs upgrading with a 60% price target usually gets attention from traders.
- The chart looks great. New highs are coming.
- Goldman's new target of $26 is the new Street high.
- The call actually makes some sense. It's boring but it makes sense.
I'm sure traders will drive this one nuts already in the pre-market. If you want to join them, fine with me. Personally, I'm looking to get long after the open dip (if there is one).