July 28, 2016

Wyndham: Bullish Sentiment Unwarranted


Summary

  • Wyndham Worldwide Corporation (WYN) is expected to see slight ROA’ growth, but given management’s concerns about their operations, this may be unwarranted.
  • WYN is currently trading at a 17.9x V/E’. At these valuations, the market is pricing in expectations for an ROA’ expansion to 16.5%, with no material Asset’ growth.
  • Market expectations appear high, and management’s concerns about RevPAR, customer loan defaults, and sustaining growth imply that valuations may be too bullish.

WYN - PVP Chart - 2016 06 20

Performance and Valuation Prime™ Chart

The firm had relatively stable ROA’ prior to 2009, ranging from 9.2%-9.5% levels, with the exception of 16.3% in 2004 and 13% in 2008. ROA’ has marginally improved since 2009, recovering from 7.6% to 12.8% in 2015, while still below peak levels seen prior to the Great Recession. Additionally, the firm has struggled to grow the business efficiently, seeing nearly non-existent Asset’ growth since 2009 as the firm tried to focus on profitability improvements.

Performance Drivers – Sales, Margins, and Turns

It can be helpful to break down ROA’ into its DuPont formula parts, Earnings’ Margin and Asset’ Turns, which are the cleaned up margins and turns metrics used to calculate ROA’. The chart below details both Earnings’ Margin and Asset’ Turns historically, to help us better understand the drivers of the firm’s profitability and performance.

WYN - SMT Chart - 2016 06 20

Valuation Matrix – ROA’ and Asset’ Growth as Drivers of Valuation

When valuing a company, it is important to consider more than a singular target price, and instead the potential value of a firm at various levels of performance. The below matrix highlights potential overvalued or undervalued prices for WYN at various levels of profitability (in terms of ROA’) and growth (Asset’ growth.) Prices that are in excess of 10% equity upside are highlighted in black, and prices representing an excess of 10% equity downside are highlighted in red.

WYN vm 7-27


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