Laughing Water Capital - Hilton Grand Vacations: Heads We Win Soon, Tails We Win More Later

seekingalpha02-08

Hilton Grand Vacations had a year that came with undeniable improvements to normalized earnings power, and undeniable short-term problems.HGV announced they would be acquiring Bluegreen Vacations.I ...

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Hilton Grand Vacations (NYSE:HGV) HGV, the Hilton branded timeshare business, had a year that came with undeniable improvements to normalized earnings power, and undeniable short-term problems. On the problem side, as mentioned previously the Company was forced to cut guidance following the well-publicized wildfires in Hawaii. Additionally, part of HGV's business is tied to financing purchases by new owners, and this is a spread business where the Company borrows at one rate and then lends at a higher rate. Rising interest rates put pressure on this spread. On the undeniable improvements to normalized earnings power side, HGV announced they would be acquiring Bluegreen Vacations (BVH), an un-branded player that has partnerships with Bass Pro Shops and NASCAR. I admit I was initially not thrilled with this acquisition as HGV is still integrating the 2021 acquisition of Diamond Resorts, and has only recently returned to their pre-Covid pattern of aggressively repurchasing shares. However, these are scarce assets that must be bought when they are available, the price paid after easily achievable synergies is very reasonable, HGV was NOT the high bidder (BVH preferred to sell at a lower price in order to partner with HGV), and these assets open up HGV's customer acquisition funnel to the lower end of the Hilton Honors loyalty network. Importantly, there is a demonstrated history of branded players being able to realize more revenue out of unbranded assets in the timeshare industry. Lastly, management has indicated they would continue to repurchase shares. At this point, I think there are two likely outcomes for HGV stock. In the first scenario, by year-end 2024, the market begins to give HGV credit for their normalized earnings power inclusive of BVH synergies, which should be fully realized by year-end 2025. At the same time, the market recognizes that this business is more durable than most expect. HGV remained FCF positive through Covid and was able to make a large acquisition, yet trades at a lower multiple now than it did pre-Covid. At the same time, cruise lines were cash furnaces through Covid, and were forced to massively dilute their equity to stay alive. Yet cruise lines now trade at a premium to the multiple they traded at pre-Covid. In fact, Cruise lines trade around ~25x 2025E FCF to equity, while HGV trades at less than 5x my estimate of normalized 2025E FCF to equity.vi I don't like to hang my hat on relative valuation, but this discrepancy is massive, especially in context of the continued potential for macro weakness. If the economy slows, cruise lines have a real problem. If the economy slows, HGV's business will be just fine, and they will be able to repurchase shares at lower prices. If the market recognizes the absurdity of this relative valuation, HGV shares could be up ~150% in 2024. That is clearly a blue sky outcome and should not be taken as a base case, but in context of Royal Caribbean's (RCL) 162% gain in 2023, it should not be entirely dismissed either. To be fair, cruise lines benefit from being in the SP500 and have ~15 sell-side analysts, while HGV is not in the SP500 and has 5 analysts, who have not yet updated their estimates to reflect the acquisition of BVH, so perhaps HGV will not aggressively re-rate. In this scenario, I believe HGV will become an \"uber-cannibal\" and aggressively return capital to shareholders through buybacks for years to come. The Company's stated goal is to repurchase ~$100M shares of stock per quarter, which equates to about 9% of the company per year at current prices. These situations never look sexy at a moment in time, and taking a long-term view is decidedly out of favor on Wall Street these days, but there are many examples (AZO and NVR come to mind immediately) of companies with relatively boring business models that compounded at 20+% per year over long periods of time by growing a bit every year and repurchasing stock every year. A (very) low starting valuation means that eventually the market will take note and multiple expansion will follow, likely leading to multibag gains with time. HGV's business is such that while they will have good years and bad years, they have 25 years of cohort data that shows that overtime owners reliably increase their spend, which will increase earnings. Further, they are in a strong inventory position at present which represents continued future organic growth, and in this day and age, travel is essentially a fundamental human need, right up there with food and shelter. All else equal I would prefer that shares of HGV rapidly re-rate, but I view this investment as a heads we win soon, tails we win more later setup.   Footnotes iCruise line multiples based on sell side consensus provided by Sentieo. HGV multiple is LWC's estimate.  Disclaimer This document, which is being provided on a confidential basis, shall not constitute an offer to sell or the solicitation of any offer to buy which may only be made at the time a qualified offeree receives a confidential private offering memorandum (\"CPOM\") / confidential explanatory memorandum (\"CEM\"), which contains important information (including investment objective, policies, risk factors, fees, tax implications and relevant qualifications), and only in those jurisdictions where permitted by law. In the case of any inconsistency between the descriptions or terms in this document and the CPOM/CEM, the CPOM/CEM shall control. These securities shall not be offered or sold in any jurisdiction in which such offer, solicitation, or sale would be unlawful until the requirements of the laws of such jurisdiction have been satisfied. This document is not intended for public use or distribution. While all the information prepared in this document is believed to be accurate, Laughing Water Capital, LP, Laughing Water Capital II LP, and LW Capital Management, LLC make no express warranty as to the completeness or accuracy, nor can they accept responsibility for errors appearing in the document. An investment in the fund/partnership is speculative and involves a high degree of risk. Opportunities for withdrawal/redemption and transferability of interests are restricted, so investors may not have access to capital when it is needed. There is no secondary market for the interests and none is expected to develop. The portfolio is under the sole trading authority of the general partner/investment manager. A portion of the trades executed may take place on non-U.S. exchanges. Leverage may be employed in the portfolio, which can make investment performance volatile. The portfolio is concentrated, which leads to increased volatility. An investor should not make an investment, unless it is prepared to lose all or a substantial portion of its investment. The fees and expenses charged in connection with this investment may be higher than the fees and expenses of other investment alternatives and may offset profits. There is no guarantee that the investment objective will be achieved. Moreover, the past performance of the investment team should not be construed as an indicator of future performance. Any projections, market outlooks, or estimates in this document are forward-looking statements and are based upon certain assumptions. Other events that were not taken into account may occur and may significantly affect the returns or performance of the fund/partnership. 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Parties should independently investigate any investment strategy or manager and should consult with qualified investment, legal, and tax professionals before making any investment. The fund/partnership is not registered under the investment company act of 1940, as amended, in reliance on an exemption thereunder. Interests in the fund/partnership have not been registered under the Securities Act of 1933, as amended, or the securities laws of any state and are being offered and sold in reliance on exemptions from the registration requirements of said act and laws. The S&P 500 and Russell 2000 are indices of US equities. They are included for informational purposes only and may not be representative of the type of investments made by the fund.  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