Inside Wall Street: Finding Comfort at a Reinvigorated Wyndham

When shares of Wyndham Worldwide (WYN) plummeted to $2.77 on Mar. 6, 2009 from around $10 in early January last year, plenty of investors worried that the large global hospitality company may be on the brink. They were wrong. The stock has since rocketed to $21 in spite of the company's major exposure to the moribund hotel and time-share lodging businesses, which got slammed during the recession. Now several pros believe Wyndham will hit $32 in 12 months. It traded as high as $25 in 2008.But investors indeed had reasons for concern: Revenues had tumbled to an estimated $3.7 billion in 2009 from $4.2 billion the prior year, and earnings per share dropped to $1.77 from 2008's $2.18. The bears say Wyndham isn't out of the woods yet. They now predict that lodging industry fundamentals will likely deteriorate in 2010, and that a recovery won't occur until 2012, at the earliest.

Wyndham franchises upscale and economy hotels, sells interests in vacation ownership resorts and facilitates the exchange and rental of properties, commonly referred to as time-shares.

"Maximization of Free Cash Flow"

Despite severe challenges that buffeted the company, strong management steered Wyndham through the morass of industry problems by focusing on the resiliency of certain parts of its businesses, says Robert A. LaFleur, senior equity analyst at Susquehanna Financial Group. Part of its newly reinvigorated plan is to enhance shareholder value, he says.

Management has made it "crystal clear," says LaFleur, that Wyndham's "primary focus now and into the future is the maximization of free cash flow and using it for growth-oriented acquisitions, or sending it back to shareholders via dividends or share buybacks." Indeed, Wyndham could well be regarded as a cash-flow play.

The company has effectively turned its lodging and time-share businesses into "cash cows," says LaFleur. How? It has rebalanced its portfolio to concentrate on its fee-for-service businesses, such as hotel franchising and vacation rentals. In its time-share service operations, management has dramatically improved cash flow, notes LaFleur, by spending less on development projects, selling low-performing assets and reducing growth in time-share receivables.

Downsizing Pays Off

Wyndham's lodging and time-share rental business require little ongoing capital expenditures, notes LaFleur, but they produce incremental cash flow growth. They also enjoy low earnings volatility, enabling them to hold up remarkably well during the economic downturn.

Efforts are under way to boost unit growth in the lodging business and increase the retention of franchises. In its time-share operations, which used to be a huge user of capital, the company has downsized the business, in part by selling some assets.

From all these changes, LaFleur figures Wyndham will generate annually around $800 million in EBITDA (earnings before interest, taxes, depreciation and amortization) and some $600 million in free cash flow for the foreseeable future. The ramp-up of share buybacks should result in boosting EPSgrowth to the mid-teens, figures. LaFleur rates Wyndham a buy with a 12-month target of $32 a share based on a sum-of-the-parts valuation.

The Pressure May Not Let Up

Wall Street has started to embrace the prospects of a major turnaround at Wyndham. Of the nine analysts who track it, seven now recommend buying the stock, and two rate it a hold.

Despite reservations about the hotel group as a whole, "we maintain a buy on Wyndham as the de-emphasis of time-share should drive significant improvement to the company's free cash flow," says Jake Fuller, analyst at Soleil Securities. He figures Wyndham earned $1.77 a share in 2009 on revenues of $3.67 billion. For 2010, he expects sales and earnings will continue to be under pressure. He projects earnings of $1.63 a share in 2010 on revenues of $3.64 billion.

Wyndham has impressed the Street with its decisive moves to reinvent itself as a global hospitality company. For investors who failed to catch the stock's turnaround last summer, this may be another opportunity to check in at the evolving Wyndham.

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