Friday, May 1, 2009

Bookkeeping: Creating New Position in Wyndham Worldwide (WYN)

After writing the piece on hotels last night [May 1, 2009: A Stroll Through the Hotel Space] I was struck on how cheap Wyndham Worldwide (WYN) was so I went back over the past 6 months to see what exactly happened to get this stock to fall to the $3 area a few months ago. I thought maybe it was its terrible debt load (nearly $4 Billion) but many of the major hotel operators have the same amount of debt and people are chasing into their stocks like there is no tomorrow. What really hurt the company back in February, outside of a huge loss due to a goodwill charge was them announcing they would issue stock. Why? They wanted to build up a cash load for future acquisitions of distressed competitors. But the stock was at $6, and investors punished the company with a 30% drop - dilution at that low of a price was not making people happy, and the company immediately rescinded the share offering.
  • Shares of Wyndham Worldwide Corp. gained on Tuesday after the hotel company canceled a stock sale that sent its shares 30 percent lower on Friday. Wyndham shares gained 28 cents, or 6.7 percent, to close at $4.46. The stock has traded between $2.55 and $24.43 during the past 52 weeks.
  • On Friday, Wyndham announced that it planned to issue and sell $200 million of equity to support its credit ratings and help position the company to take advantage of strategic opportunities this year. After investors' dramatic sell-off of Wyndham stock, the company on Monday canceled the offering.

  • In a note to investors, Susquehanna Financial Group analyst Robert LaFleur said the plan "made no sense given (Wyndham's) current liquidity and capital needs, not to mention the fact the shares were trading at a significant discount." "Despite its intention to improve liquidity, protect its ratings, and give it ammo to take advantage of distressed opportunities, the plan was ill-conceived and poorly vetted," LaFleur said. "Management dug itself into a serious credibility hole, which will take quite some time to dig out of."

  • Friedman Billings Ramsey analyst C. Patrick Scholes said lowering the Parsippany, N.J.-based company's dividend may be a better option than the proposed stock sale, which he called "confounding." "Although we understand the desire for cash for potential distressed opportunities, the problem with issuing equity is that the bull case for owning shares of (Wyndham) is its cheap relative valuation," Scholes said. "Potentially selling shares at the current price contradicts one of the primary reasons for owning the stock."

  • "The market reaction to our announcement was strongly negative, and we appreciate the feedback from our shareholders," said Wyndham Chairman and Chief Executive Stephen Holmes in a statement. (that comment makes me chuckle - appreciate the "feedback")

Now I do hate to chase stocks, and Wyndham Worldwide was up 30%+ one day alone this week (post earnings) but after reviewing the history this was a great result considering their huge loss last quarter (big goodwill write off). NOT chasing stocks has cost me a lot of profit opportunities these past 4-5 weeks... things that are up 30%, just keep getting bid up. Now I do believe this move is long in the tooth but if I am wrong I want to start an initial position and then if I am correct (some pullback happens) I can average in down lower. At 7ishx earnings which they reiterated I can sleep with the valuation unlike those who momentum chase stocks at 25, 30, 35x forward earnings. I hate the debt load but no one cares about debt anymore it seems because the Federal Reserve won't allow failure in the USSA.

So my strategy is to begin a position here in $11.70s - only a 1.5% stake. Any pullback to $9s I will add in a material way. If Wyndham Worldwide were valued at same level (on earnings) of a Marriott (MAR) for example it would be trading at more than $42. While I don't expect that valuation - this sort of raging gulf in valuation is the only reason I am willing to chase such an extended stock .... That said, they are not apples to apples; value chain versus larger premium chain and Wyndham has much more exposure to time shares (I imagine a horrible business in this climate). Not to mention Marriot is one overvalued .... swine, so I don't expect an equitable valuation. But even a 12x forward multiple on 2009 estimates - you have a $20 stock price and very material upside from here. The main issue is debt but the analysts seem "ok" with the liquidity position and if management had the gall to issue shares a few months ago to do even more acquisitions it must not be as much of an issue as I assume.

Long Wyndham Worldwide in fund; no personal position

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