Over the past six months, Marriott Vacations’s shares (currently trading at $64.43) have posted a disappointing 17.3% loss while the S&P 500 was flat. This might have investors contemplating their next move.
Is now the time to buy Marriott Vacations, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Marriott Vacations Will Underperform?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why VAC doesn't excite us and a stock we'd rather own.
1. Decline in Guests Points to Weak Demand
Revenue growth can be broken down into changes in price and volume (for companies like Marriott Vacations, our preferred volume metric is guests). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Marriott Vacations’s guests came in at 1,507 in the latest quarter, and over the last two years, averaged 99.9% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Marriott Vacations might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability. 
2. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative 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. Over the last few years, Marriott Vacations’s ROIC has unfortunately decreased. 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.
Marriott Vacations’s $5.72 billion of debt exceeds the $406 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $751 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. Marriott 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 Marriott Vacations can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Marriott Vacations falls short of our quality standards. After the recent drawdown, the stock trades at 8.5× forward P/E (or $64.43 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
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