On Aug 5, we maintained an Outperform rating on the leading hospitality company, Wyndham Worldwide Corporation (WYN), following its better-than-expected second-quarter 2013 results and increased earnings guidance. Wyndham’s strong brand power, solid pipeline and significant international exposure should bode well for future growth.
Why the Reiteration?
On Jul 24, 2013, Wyndham posted solid second-quarter 2013 results. The company’s adjusted earnings of 98 cents per share surpassed the Zacks Consensus Estimate by 8.9% and also grew 12.6% year over year. Higher top line growth and solid margin expansion pushed up the quarterly earnings.
Net revenue grew 10% year over year and also beat the Zacks Consensus Estimate by 8.3%. Wyndham’s strong Lodging as well as Vacation Ownership businesses played a major role in augmenting the quarterly sales. Following this better-than-expected performance, Wyndham raised its full-year earnings per share guidance from the range of $3.60 – $3.70 to $3.66 – $3.76.
The U.S. hotel industry is slowly improving as the overall economy begins to look up. The company continues to generate room-rate gains in the domestic upscale and mid-scale segments with an increase in occupancy levels. According to Smith Travel Research, the U.S. supplies are expected to be up nearly 1% in 2013. With a low supply growth environment the company will be able to raise its room rate, going forward.
Wyndham’s vacation ownership or timeshare business has solid long-term potential. This fee-for-service business reduces capital requirement, resulting in higher free cash flow. In 2009, Wyndham introduced a new initiative, Wyndham Asset Affiliation Model (WAAM), which will help it to rebalance its portfolio by increasing contributions from fee-for-service businesses. The company expects to achieve its WAAM target of 15% to 20% of gross Vacation Ownership Interest (VOI) sales over the next five years.
We believe the company’s back-to-back acquisitions, substantial development pipeline and significant international exposure will further boost its growth, going ahead. Moreover, regular share repurchase activity and dividend distribution helped augment investors' confidence for this Zacks Rank #2 (Buy) company.
Other Stocks to Consider
Other players in the hotels and casino sector that are currently performing well include Caesars Entertainment Corporation (CZR), Marriott Vacations Worldwide Corp. (VAC) and Hyatt Hotels Corporation (H). All these companies carry a Zacks Rank #2 (Buy).
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