Travel + Leisure Co. Stock: Healthy Financials, Attractive Valuation (NYSE:TNL)

Consumer stocks might have run up recently, but there are some that at first look still sound promising. Like Travel + Leisure Co. (NYSE: NYSE:TNL), whose price-to-earnings (P/E) ratio of 9.6x is appreciably below the 14.7x for the consumer discretionary sector as a whole. The stock has been gaining ground recently, though, rising by almost 19% in January 2023 alone. This analysis unpacks whether its fundamentals indicate further rise, considering its attractive valuation, or whether it’s valued lower for a reason.

Predictable revenues

TNL with the catchy mission statement “We put the world on vacation”, isn’t just creating fun times for its customers, it also treats its employees well. It recently earned recognition from Forbes magazine as one of the best employers in the world. Do happy employees translate into good company performance, though? As it turns out, there’s much to like about it.

First, consider TNL’s business model. The company has two business segments. The first and dominant one is vacation ownership, which allows the buyer the right to a certain amount of time at a resort. The second is travel and membership, which as the name suggests provides travel membership services. The nature of both segments allows revenue predictability. In fact, the company says that around 80% of this revenue is predictable (see chart below). This also gives confidence in its own projections.

Healthy revenues

Even so far, in 2022, it has had a good going, with a revenue increase of 18% year-on-year (YoY) up to the first nine months of 2022 (9M 2022). And going by its projections, its revenues can continue to see robust growth for the full year 2022 as well.

The company expects vacation ownership interest [VOI] sales to be at $1.95 to $2 billion in 2022, a 32.5% increase. So far in the year, it has already clocked $1.46 billion in gross VOI sales. To achieve the number, these sales need to grow by $514 million in the final quarter of the year (Q4 2022), which sounds achievable considering that they were at a higher $555 million in Q3 2022. Also, gross VOI sales have grown at 38% for 9M 2022, so the growth rate expected for 2022 is also plausible.

This is a positive directional indicator for revenues, but it’s essential to note that it doesn’t give an entire outlook on revenues. There are three reasons for this. First, in estimating TNL’s revenues, net VOI sales are considered, which are around 75% of the gross VOI sales for 9M 2022. Next, net VOI sales account for only 41% of the company’s revenues. And third, they have grown far faster at 35.7% YoY than the rest of revenues, which rose by just 7.9%.

Still, assuming that the company’s proportion of net VOI sales to revenues stays constant and so does the ratio of net VOI sales to gross VOI sales, its revenues will grow at a healthy pace for 2022 of at least 15% if growth in revenue ex-net VOI sales is sustained. There’s no reason to expect why it won’t happen. The number has grown at 7.9% in Q3 2022, the same as the average growth for 9M 2022.

The projected revenue growth rate will be slower than that for 2021 of 45.1%, but then that was an outlier year with the benefit of a base effect from the lockdown year of 2020. In absolute terms, the revenues will still be lower than the pre-pandemic numbers of $4 billion in 2019, but hearteningly enough, it’s likely getting closer.

Positive earnings direction

Further, the company expects its adjusted EBITDA to grow by 10.5% YoY in 2022 assuming it would grow at the average of the company’s projected number at $855 million to $865 million. Considering that its net income in the past has been at around 40% of this number, this boils down to a basic earnings per share [EPS] of $4.1. This is a simplification for estimating earnings, but it still indicates the likely direction.

At this EPS, TNL’s price-to-earnings (P/E) ratio comes to 10.4x, which isn’t a significant change from the current number at 9.6x. It also stays appreciably below that for the consumer discretionary sector. Analysts are optimistic about its future earnings as well, with the average earnings estimate at around $4.5. This also gives it a favourable forward P/E ratio of 9.6x compared to 15.7x for consumer discretionary stocks on average.

Macro risks

I don’t see any risks to the company looking at its balance sheet and cash flow either. The big risk to TNL, as with all consumer discretionary companies, however, is that 2023 is still up in the air. Concerns about high inflation and the expectation of a recession were looming large when we started this year. However, increasingly the news flow suggests that it might just not happen in the big western economies. We don’t know. And that’s the point. Consumer discretionary stocks have rallied recently on an improved outlook and better inflation numbers. But this can change very fast. Moreover, it can impact the performance of these companies, not just their stock price.

The margin advantage

However, I do see a big advantage for TNL, which is its margins. It has a gross profit margin of 49.2% and a fairly high operating margin of 20.2% for the latest quarter. This means, that even if there’s an inflation shock anytime in the near future, it can stay well insulated. Its revenues could be impacted more if garnering new customers gets difficult, and also with regard to its consumer financing for VOI sales.

What next?

On the whole, though, I like the stock. Its revenues and earnings are going. The rest of its financials are problem-free too. Its margins stand out, in case there’s another spike in inflation. The fact that it’s trading at an attractive valuation is another positive. I’m also encouraged by its consistent growth since 2017 in both revenues and operating profits, save 2020. There could be some challenges ahead in terms of weak demand and defaults on loans if there’s a recession in 2023. But that remains to be seen. I’d buy it.