Hilton Grand Vacations’s 17.5% return over the past six months has outpaced the S&P 500 by 7.5%, and its stock price has climbed to $49.76 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Hilton Grand Vacations, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Hilton Grand Vacations Will Underperform?
We’re glad investors have benefited from the price increase, but we don’t have much confidence in Hilton Grand Vacations. Here are three reasons you should be careful with HGV, plus one 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 720,079 in the latest quarter, and over the last two years, averaged 6.3% 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
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
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 $9.86 billion of debt exceeds the $261 million of cash on its balance sheet. Furthermore, its 9× net-debt-to-EBITDA ratio (based on its EBITDA of $1.02 billion 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 topping the market in recent months, the stock trades at 9.1× forward P/E (or $49.76 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. Let us point you toward the most dominant software business in the world.
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