Rising Climate Risks And Fierce Competition Will Undermine Long-Term Stability

Key Takeaways

• Climate and regulatory risks, as well as heightened competition and public health threats, undermine future demand and revenue stability.
  
• Labor shortages and negative sentiment toward timeshares constrain profitability and make margin improvement increasingly difficult.
  
• Strong recurring revenue, growing owner satisfaction, digital investments, and an asset-light strategy position the company for resilient growth, stable margins, and steady cash flow.

Catalysts

Provides hospitality services and travel products in the United States and internationally.

• Persistent climate-related regulatory risks, such as impending carbon taxes and heightened restrictions on air travel, threaten to structurally suppress discretionary travel demand over the coming decade, which would directly erode Travel + Leisure's long-term revenue pipeline and lower visibility for future bookings.
  
• The global rise in geopolitical shocks and public health crises is likely to result in more frequent or sustained travel disruptions and cancellations, causing both unpredictable revenue shortfalls and greater volatility in net margins, especially as the company increases its exposure to new international markets.
  
• Intensifying negative sentiment and tightening regulations around the timeshare and vacation ownership model could put continuous downward pressure on volume sales growth and profitability, particularly as consumers become more sensitive to aggressive sales tactics or less attracted to long-term travel commitments.
  
• The expanding presence of alternative lodging platforms such as Airbnb and Vrbo is intensifying competition, making it increasingly difficult for Travel + Leisure to differentiate its offerings and maintain pricing power, which will likely drag on both topline revenue growth and compress net earnings in the long run.
  
• Structural labor shortages across the hospitality industry are expected to drive up wage costs and limit service quality, further constraining profitability and hindering efforts to sustain or improve operating margins, even as the company pursues asset-light initiatives.

Travel + Leisure Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Travel + Leisure compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Travel + Leisure's revenue will grow by 3.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 9.9% today to 11.2% in 3 years time.
• The bearish analysts expect earnings to reach $477.2 million (and earnings per share of $8.23) by about July 2028, up from $385.0 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 6.9x on those 2028 earnings, down from 10.7x 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 5.0% 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.

Travel + Leisure Future Earnings Per Share Growth

Risks

• A highly recurring revenue base, supported by over 75% of sales coming from predictable sources like owner upgrades, financing, and management fees, provides a substantial $20 billion pipeline over ten years and makes revenue and earnings less sensitive to macroeconomic swings.
  
• The company continues to see robust engagement and satisfaction among its owner base, demonstrated by high booking rates, consistent tour growth, average household income of $118,000, strong FICO credit quality, and a high retention rate, supporting durable sales, strong margins, and predictable cash flows.
  
• Expansion into new brands (such as Margaritaville, Accor, and Sports Illustrated Resorts) and international markets aims to unlock incremental sales and broaden the total addressable market, positioning the company for long-term top-line growth and margin stability.
  
• Investments in digitalization, mobile-first engagement, and AI-powered customer experience are driving higher booking engagement, personalized upselling, and operational efficiencies, likely resulting in increased average revenue per user and improved net margins.
  
• The company's focus on an asset-light development strategy, effective cost controls, disciplined underwriting, and robust inventory recovery mechanisms underpins resilient free cash flow generation and capital efficiency, helping sustain both earnings and shareholder returns over the long term.

Valuation

• The assumed bearish price target for Travel + Leisure is $42.14, which represents two standard deviations below the consensus price target of $62.17. This valuation is based on what can be assumed as the expectations of Travel + Leisure'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 $71.0, and the most bearish reporting a price target of just $39.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $4.3 billion, earnings will come to $477.2 million, and it would be trading on a PE ratio of 6.9x, assuming you use a discount rate of 11.6%.
  
• Given the current share price of $61.87, the bearish analyst price target of $42.14 is 46.8% 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.