Is Diamond Resorts the Best Play on Timeshares?

Is Diamond Resorts the Best Play on Timeshares?

Diamond Resorts International may not be as much of a household name as the big-time hotel chains and timeshare businesses, but that could be a good thing for growth-seeking investors. With the leisure and hospitality industry showing promising growth over the coming years, this smaller play looks poised to grow faster than its larger brethren while the stock price reflects similar valuations. It's only been a few months since the company went public and the stock has climbed a little more than 10%. Undoubtedly, Diamond Resorts will see both top- and bottom-line improvements as the company expands and improves unit-level metrics. Here's what investors need to know now.

Earnings report
The company's first third-quarter report as a public entity showed top-line gains of more than 34% to $191.6 million. Its hospitality and management services booked a gain of 12%, mainly due to two resort acquisitions completed during the summer.

Vacation Interest sales, commonly known as timeshares, exhibited very strong growth as well -- up 48.5% to $123.7 million. Making up the bulk of Diamond Resorts' business and revenue, vacation interest grew due to increased marketing and sales tours and a 36% increase in the average sale price.

Adjusted EBITDA grew by more than 56% -- a testament to the company's improving margins in areas such as management expense, closing percentage (sales pitches converting to transactions), higher average sales, and lower advertising expense as a percentage of sales. General and administrative costs, absent of a one-time non-cash charge, decreased slightly more than 8%.

Part of Diamond's value proposition to its customers is a point-based timeshare system versus the traditional block of days/weeks model. Management is confident that its unique business model, which it says allows for more flexibility, is what continues to drive new customers and contribute to the high conversion rates.

Diamond in the rough?
Comparing the company to other timeshare businesses, such as Marriott's Marriott Vacations Worldwide , this business looks equally appealing. Marriott Vacations Worldwide is projected to grow and take advantage of the industry tailwinds, and is in itself an attractive investment (more on that here). Though much larger in terms of employee count (read: sales force) and with a more recognizable brand name, the two companies service a similar number of customers. Both VAC and Diamond are valued at around 19 times their respective one-year forward earnings estimates. Marriott Vacations does, however, have a more conservative balance sheet with current assets that handily cover total liabilities.

Diamond holds on to nearly $750 million in debt with only $40 million in cash.

Growth investors interested in the asset-light, cash-flow-centric timeshare business can take a look at either of these businesses as both offer appealing growth at a halfway reasonable price. Marriott Vacations, however, looks to be the less-risky pick based on balance sheet strength and cash flow to shareholders.

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