We are upgrading our rating on Wyndham Worldwide Corporation (WYN), a hospitality company operating through three business segments – Lodging, Vacation Exchange and Rentals and Vacation Ownership, to Outperform from Neutral.
The rating upgrade is based on solid first quarter 2011 results, which were well ahead of the Zacks Consensus Estimates primarily driven by strong operational performance across all the company’s business units, sound cost control and continued share repurchases. Additionally, the outlook for the travel and tourism business is also positive as the World Travel and Tourism Council forecasts that over the next 10 years, the global travel and tourism economy will grow 4.3% annually. Wyndham also raised its earnings outlook for fiscal 2011.
Going forward, we expect Wyndham to benefit from its migration to a more fee-for-service-based business and strategic focus on Vacation Exchange and Rental business. Wyndham is also experiencing recovery in the lodging business on the back of a surge in leisure demands. Moreover, to ensure growth in the lodging business, the company has undertaken a strategic initiative named Apollo to drive incremental revenues from its franchises and strengthen its brands.
Wyndham also remains committed to enhancing shareholder value and expanding through acquisitions given the company’s robust free cash flow generation. Moreover, the company is expanding its footprint in international markets, particularly in Europe and Asian markets like China and India. Wyndham currently has 14 branded hotels open or under development in China, and it plans to open its first hotel in India in the second half of 2011 and in the Middle East in spring 2011. The company has also recently announced a master development agreement for more than 75 new Microtel hotels in Canada over the next 25 years.
First Quarter Results
Wyndham first quarter 2011 adjusted earnings of 44 cents per share outpaced both the Zacks Consensus Estimate of 39 cents and the year-earlier quarter earnings of 34 cents per share. The increase was mainly driven by higher revenue per available room (RevPAR) in the Lodging business, strong operational performance by the Vacation Ownership and Vacation Exchange and Rentals business.
Net revenue spiked 7.4% year over year to $952 million in the reported quarter, reflecting a modest adjusted sales momentum across Wyndham’s three business units and substantial contributions from acquisitions. However, revenues failed to beat the Zacks Consensus Estimate of $962 million.
During the quarter, the board of directors of Wyndham approved an additional buy back program of $500 million, which is the largest increase in authorization in five years.
Outlook
For full-year 2011, management raised its earnings per share guidance from $2.05–$2.15 to $2.15–$2.25 range. However, the company maintained its 2011 revenue guidance of approximately $4.0–$4.2 billion and adjusted EBITDA of approximately $925–$955 million.
Earnings Estimate Revisions: Overview
Following the first quarter earnings release, the Zacks Consensus Estimate for the company has been on the rise, with the analysts remaining bullish on the stock. The strong first quarter results bolstered the analysts’ confidence. The earnings estimate details are discussed below.
Agreement of Estimate Revisions
A positive inclination can be witnessed among the analysts, who mostly remain bullish on Wyndham. Revision trends in the last 30 days drifted toward the positive side. For fiscal 2011 and 2012, all the analysts covering the stock raised their estimates. None of the analysts moved in the opposite direction.
The analysts have increased their estimates based on robust first quarter results and increased earnings guidance by the company. Moreover, the analysts expect the company to generate a robust free cash flow and deploy the cash to shareholders via dividends and share repurchases. However, there has been no movement in analysts’ estimates over the last 7 days.
Magnitude of Estimate Revisions
Earnings estimates rose 13 cents to $2.26 for fiscal 2011 and were up 15 cents to $2.59 for 2012.
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