HGV - Hilton Grand Vacations: Significant Revenue Growth But Still Cautious

Summary

• Hilton Grand Vacations has seen a strong recovery in revenue and earnings growth as compared to last year.
• The company's balance sheet also looks respectable.
• However, investors are likely to be cautious in the short to medium-term.

Investment Thesis: While Hilton Grand Vacations (HGV) could have longer-term upside, a potential dip in seasonal demand could mean the stock sees little growth in the short to medium-term.

In a previous article back in July, I made the argument that Hilton Grand Vacations has upside potential, but the stock could rebound cautiously as investors look for further evidence of earnings growth.

Since my last article, the stock is down by just over 5%:

The purpose of this article is to assess whether the stock could be expected to see a rebound from here - and what investors might be looking for in the upcoming earnings quarter.

Performance

When looking at revenue performance for June 2022 - we can see that the recovery as compared to 2021 has been strong, both on a three and six-month basis, with the recovery across sales of VOIs (vacation ownership interests), net, being particularly strong:

What is particularly interesting is that total revenues for June 2022 were still significantly above levels seen for June 2018 and 2019:

Additionally, it is also noteworthy that diluted earnings per share for the six months ended June 2022 came in at $1.01 - which was the same as that seen for the six months ended June 2019.

At this point in time, the stock is trading at a similar price range to that seen in June 2019 - indicating that there could be scope for the stock to rise further if earnings growth continues:

From a balance sheet standpoint, we can see that the percentage of debt to total assets for June 2022 was at a similar level to that of June 2019:

Source: Figures sourced from Hilton Grand Vacations Q2 2019 and Q2 2022 Results. Figures provided in millions USD (except debt to total assets). Percentage of debt to total assets calculated by author.

Looking Forward

Going forward, I take the view that investors will pay particular attention to see if earnings growth can continue to surpass levels seen in 2019.

With the winter season approaching, it can be expected that there may be a seasonal drop in demand for the next couple of quarters.

However, investors are likely to continue paying attention to balance sheet metrics such as debt to total assets - as evidence that the company can withstand seasonality in demand without having to significantly increase its debt levels.

As mentioned in my previous article, inflation could potentially bolster timeshare demand given that timeshares can potentially allow for members to lock-in a fixed rate on a vacation property as opposed to having to pay rising prices under a traditional hotel booking model.

This trend seems to have accelerated in the most recent quarter, given sales of VOIs are up sharply on that of last year.

In the upcoming earnings quarter, I take the view that investors will be looking to see if VOI sales as compared to the same quarter last year also shows growth - as this may support the possibility that customer demand for timeshares is increasing in an inflationary environment.

With that being said, there is always the risk that timeshare interest could decrease during inflationary periods, as customers may be less likely to want to commit to a timeshare given the upfront costs. Additionally, as customers become more discerning of their discretionary spending during inflationary periods, timeshares may also see a dip in demand.

Conclusion

To conclude, Hilton Grand Vacations has seen a significant recovery in revenues and earnings as compared to last year.

I take the view that the stock could have potential upside from here, but a potential dip in seasonal demand could mean the stock sees little growth in the short to medium-term.

Additional disclosure: This article is written on an "as is" basis and without warranty. The content represents my opinion only and in no way constitutes professional investment advice. It is the responsibility of the reader to conduct their due diligence and seek investment advice from a licensed professional before making any investment decisions. The author disclaims all liability for any actions taken based on the information contained in this article.

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