Should You Give This Stock a Share Of Your Time?

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

While many investors like exciting growth stories and charismatic CEOs, I prefer to select companies with significant competitive advantages by virtue of their business models. Companies, which are beneficiaries of the network effect, tend to enjoy high customer retention rates and become stronger as they grow in size. 

Interval Leisure Group (NASDAQ: IILG), is such a company, with an extensive timeshare exchange network of about two million members and 2,800 resorts in more than 75 countries.

Beneficiary of the network effect

If you are the owner of the hottest technology company in Silicon Valley, you will be thinking of NASDAQ as a potential listing venue. On the other hand, if you want to monetize your mining assets in the Asia Pacific region, the Australian Stock Exchange might be your choice. As more companies in the same industry are listed on a particular stock exchange, the listed stocks tend to achieve higher valuations. This is because of the availability of comparable companies and a concentration of investors who understand the industry.

Similar to stock exchanges, Interval Leisure benefits from the network effect. As more members join Interval Leisure’s network, the value of its network increases for its members, as more timeshare and properties are available for exchange. This in turn attracts new members seeking to leverage on the availability of options on Interval Leisure’s network.

Besides timeshare traders, resort developers are also keen to be part of Interval Leisure’s network. Most of them sign multi-year affiliation agreements with Interval Leisure, because they know that participating in such a network allows them to sell timeshare to new customers and satisfy their existing timeshare customers with a wider variety of vacation accommodations in premier travel destinations.

Interval Leisure, with a significant market share of the timeshare exchange industry, grows with time as a result of the network effect. This helps to keep smaller competitors and new entrants at bay.

High membership renewal rates derived from favorable cost-benefit analysis

I have seen an increasing amount of brick & mortar and online retailers specializing in mobile phone accessories over the past few years. In my opinion, this trend is attributed to a cost-benefit analysis, where smartphone users are more willing to spend a fraction of the price they paid for their smartphones on accessories, which enrich the entire mobile experience. In the past, where cheaper feature phones were prevalent, it did not make as much sense to pay so much for phone accessories.

The ‘stickiness’ of a product or service is dependent on the benefits it provides relative to the costs incurred. For Interval Leisure, its annual membership fee of $89 and a per transaction fee of more than a hundred dollars pales in comparison to the five figure sum typically spent in acquiring a timeshare. However, this membership, which costs so much less than the timeshare, provides the customer with what he really wants from a timeshare: flexibility. Given the huge benefit derived relative to the cost of a membership, it is no surprise that Interval Leisure enjoys membership renewal rates of above 90%.

Looking forward

Interval Leisure grew its fiscal 2012 revenues by 10%, almost double the topline growth for 2011. It also initiated its first regular quarterly dividend in March 2012, and currently sports a 2.1% dividend yield.

Going forward, Interval Leisure intends to increase average revenue per user through attracting more members to its premium programs. In May 2013, it announced that its premium membership Interval Platinum, which costs an incremental fee of $129 on top of its basic membership fee, crossed the 100,000 member mark.

Peer comparison

Interval Leisure’s peers include Wyndham Worldwide (NYSE: WYN) and Marriott Vacations Worldwide (NYSE: VAC).

Wyndham Worldwide is the largest hotel franchisor globally. It also owns RCI, the largest time share exchange network in the world, which boasts of 3.7 million timeshare owners and more than 4,000 resorts in 100 countries. RCI, its vacation exchange and rental business, accounts for close to one third of its EBITDA, with its timeshare development and hotel franchisor business segments representing a quarter and close to half of EBITDA respectively, according to a recent investor presentation.

In my opinion, Interval Leisure has stronger growth prospects than Wyndham Worldwide in the timeshare exchange business. This is because Wyndham Worldwide’s dual role as both as a timeshare exchange operator and timeshare developer makes it difficult for competing major timeshare developers to list their properties on RCI. This is validated by flat revenue growth for Wyndham Worldwide’s vacation exchange and rental business in 2012.

Similar to Interval Leisure, Marriott Vacations is a spin-off of Marriott International‘s time share unit. Interval Leisure was spun off by InterActiveCorp in 2008. However, Marriott Vacations is more of a timeshare developer. Marriott Vacations derived 49% and 20% of its revenues from sales of vacation ownership products and resort management respectively. Rental of vacation ownership inventory and the financing of consumer purchases of vacation ownership products accounted for the remaining share of its revenues. Going forward, its key target is the enhancement of development margins through the leveraging of fixed selling costs and the reduction of cost of goods sold through increased sales efficiency. Management revised its guidance for development margins from between 16.5% and 17.5% to between 17.0% and 18.0%, following better than expected results in the first quarter of fiscal 2013.

Conclusion

Interval Leisure is attractively valued, at a trailing twelve months EV/EBITDA of 8.7. Additionally, Interval Leisure has a competitive edge over its competitors, given its independence as a pure timeshare exchange network operator, with major timeshare developers more likely to list their properties on Interval Leisure’s network, in favor of competing timeshare network operators with significant timeshare developer business. 

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