Remote Work Surge And Airbnb Rivalry Will Pressure Timeshares

Key Takeaways

• Shifting consumer preferences and competition from flexible lodging alternatives challenge Hilton Grand Vacations' traditional timeshare model and growth prospects.
  
• Increased regulatory pressures and economic headwinds are expected to raise operating costs and negatively impact profitability over time.
  
• Strong recurring revenues, successful integration and cost synergies, diversified business model, and strategic partnerships position the company for stable growth and resilience amid economic shifts.

Catalysts

Develops, markets, sells, manages, and operates the resorts, timeshare plans, and ancillary reservation services under the Hilton Grand Vacations brand in the United States and Europe.

• The continued acceleration of remote work and preference for flexibility is expected to drive more consumers toward short-term rentals and experience-based travel options instead of long-term vacation ownership, reducing core demand for Hilton Grand Vacations products and threatening future contract sales growth.
  
• Rising regulatory scrutiny and evolving consumer protection laws in major markets will likely restrict Hilton Grand Vacations' sales tactics and increase compliance costs, putting long-term pressure on net margins and raising operating expenses.
  
• The declining interest in traditional timeshare ownership among Millennials and Generation Z, combined with the aging of Hilton Grand Vacations' existing owner base, will shrink the addressable market over time and constrain top-line growth opportunities.
  
• The proliferation of alternative lodging options such as Airbnb and Vrbo-offering greater flexibility, personalization, and unique experiences-will continue to erode Hilton Grand Vacations' competitive positioning, leading to softer occupancy rates and slower revenue growth in out years.
  
• Economic uncertainty and persistent inflation are poised to weigh on discretionary consumer spending, increasing default rates on timeshare loans, elevating bad debt expense, and ultimately reducing future net earnings and free cash flow conversion for Hilton Grand Vacations.

Hilton Grand Vacations Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Hilton Grand Vacations compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Hilton Grand Vacations's revenue will grow by 11.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.8% today to 7.3% in 3 years time.
• The bearish analysts expect earnings to reach $449.8 million (and earnings per share of $5.81) by about July 2028, up from $34.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 7.7x on those 2028 earnings, down from 137.9x today. This future PE is lower than the current PE for the US Hospitality industry at 24.5x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.6%, as per the Simply Wall St company report.

Hilton Grand Vacations Future Earnings Per Share Growth

Risks

• The company has demonstrated strong recurring revenue and cash flow generation, with more than half of EBITDA contractually recurring in nature and a free cash flow conversion rate of 65 to 75 percent, which provides significant financial stability and flexibility that can protect net earnings even if economic conditions become more volatile or uncertain.
  
• There is substantial ongoing demand with occupancy sustained at 77 percent, a robust and growing marketing package pipeline of over 725,000 packages, and continued rental booking momentum, indicating a solid pipeline for top-line growth and resilience in revenue.
  
• Successful integration of Bluegreen and realization of $89 million out of a targeted $100 million in cost synergies, along with ongoing rebranding and efficiency efforts, are likely to drive operating margin improvement and support long-term earnings growth.
  
• The company benefits from a highly diversified business model with multiple brands, price points, and a mix of fly-to and drive-to destinations, as well as a dedicated prepaid member base, reducing exposure to shifts in some consumer discretionary spending patterns and supporting revenue stability.
  
• Strategic partnerships with brands like Hilton, Bass Pro Shops, Great Wolf, and Choice Hotels provide expanded cross-selling and acquisition opportunities, broadening the customer base and reinforcing the value proposition, which can translate into sustained or increased revenue growth over time.

Valuation

• The assumed bearish price target for Hilton Grand Vacations is $34.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Hilton Grand Vacations's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $73.0, and the most bearish reporting a price target of just $34.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $6.2 billion, earnings will come to $449.8 million, and it would be trading on a PE ratio of 7.7x, assuming you use a discount rate of 11.6%.
• Given the current share price of $51.15, the bearish analyst price target of $34.0 is 50.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.