Hilton Grand Vacations’s 12.5% return over the past six months has outpaced the S&P 500 by 6.7%, and its stock price has climbed to $49.25 per share. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Hilton Grand Vacations, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Hilton Grand Vacations Will Underperform?
Despite the momentum, we're swiping left on Hilton Grand Vacations for now. Here are three reasons why HGV doesn't excite us and a stock we'd rather own.
1. Weak Growth in Members Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like Hilton Grand Vacations, our preferred volume metric is members). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Hilton Grand Vacations’s members came in at 722,874 in the latest quarter, and over the last two years, averaged 7.6% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.
2. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Hilton Grand Vacations’s ROIC has decreased over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Hilton Grand Vacations’s $10 billion of debt exceeds the $239 million of cash on its balance sheet. Furthermore, its 10× net-debt-to-EBITDA ratio (based on its EBITDA of $950 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Hilton Grand Vacations could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Hilton Grand Vacations can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Hilton Grand Vacations doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at 11× forward P/E (or $49.25 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are superior stocks to buy right now. We’d suggest looking at one of our top software and edge computing picks.
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