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Friday, August 7, 1998
Trendwest Resorts Inc.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TWRI)") else Response.Write("(Nasdaq: TWRI)") end if %>
Phone: 425-990-2300
Website: www.trendwestresorts.com
Price (8/6/98): $9 1/4
HOW DID IT FIND TROUBLE?
You've got Mail! After writing a Daily Double on Bluegreen <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BXG)") else Response.Write("(NYSE: BXG)") end if %> last month, along with painting the panoramic vista of timeshare company stocks in those very colors, I received some e-mail naming a few companies in the sector that have been having their share of red weeks. From Sunterra <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OWN)") else Response.Write("(NYSE: OWN)") end if %> to Silverleaf Resorts <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SVR)") else Response.Write("(NYSE: SVR)") end if %>, all is not well in the land of deeded vacations.
No doubt about it, there is danger in rented paradise.
This brings us to Trendwest Resorts <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TWRI)") else Response.Write("(Nasdaq: TWRI)") end if %>, which sells vacation condos on the West Coast, and given the recent trading in the company, one would think that El Ni�o swallowed the resorts into the Pacific Ocean.
It didn't. Honestly. Trendwest has delivered fiscally since its initial public offering last year. However, because of the new shares outstanding and some start-up expenses at new properties, the top-line sales surge has not made it all the way down to the bottom line. After respectable double-digit earnings growth over the first few quarters of Trendwest's publicly traded life, the last quarter was disheartening. While earnings were pre-announced to come in slightly below the year ago quarter because of the 3.3 million new shares, the bottom line was expected to suffer a decrease from $0.40 a share to $0.30-$0.31 a share.
It's an odd illusion this unwelcome fiscal mirage. Is Trendwest growing? Yes. Is the bottom line shrinking? Well, at least for the June quarter, yes. The stock was already in landslide when the prolific Fairfield Communities <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FFD)") else Response.Write("(NYSE: FFD)") end if %> announced lower-than-expected timeshare sales on July 23, helping send Trendwest even deeper into an equity sinkhole.
Pity Trendwest -- it was too obscure for coattails when the timeshare stocks were soaring, yet it was right there to get the brunt of the downfall when sentiment soured.
BUSINESS DESCRIPTION
Trendwest sells timeshare condos primarily in the western United States. The company provides accommodations to more than 58,000 WorldMark owners at two dozen condominium resorts worldwide.
FINANCIAL FACTS
Income Statement
12-month sales: $161.8 million
12-month income: $22.5 million
12-month EPS: $1.37
Profit Margin: 13.9 %
Market Cap: $133.2 million
Balance Sheet
Cash: $4.6 million
Total Assets: $152.3 million
Total Liabilities: $24.3 million
Ratios
Price-to-earnings: 6.8
Price-to-sales: 0.8
HOW COULD YOU HAVE SEEN IT COMING?
Is this Trendwest or Trendsouth? The stock's compass certainly has been pointing down lately. The June weakness seemed forgivable. With expenses incurred from the development of two properties and the opening of an off-site sales office in San Diego, investors may have dealt with the healthy 22% sales growth and written off the margin contraction to the short-term pains of growing future business. Yet they did not. For those keeping score at home, Fairfield's fall came from reporting a scant 12% gain in revenues.
Efforts to win back investor confidence -- from a 436,000 share buyback to a July 1 price hike on its properties (and that average 4% markup was the first price increase over the last 18 months) -- were met with a further falling share price.
Ultimately this crumbling sandcastle was hard to see coming. The fact that the late June opening of an off-site sales office hurt earnings was difficult to see coming since there was no shortfall when the company opened two similar offices in the March quarter. The company referred to the mishaps as "timing issues" that would be compensated for later in the year. Proof there was the company expressing comfort with analyst estimates for the entire year. Still, investors checked out, even if the fundamentals, well, checked out as well.
WHERE TO FROM HERE?
Every good spaghetti Western ends with the heroic cowboy riding off into the sunset. Trend? West. So can this Trendwest be the beginning of a romantic epic? It is easy to be enamored with the company's valuation.
The company has already expressed comfort in the $1.39 a share earnings projection for this year, and with the stock recently trading around $10, that puts it at a stunning six times the $1.75 EPS estimate for next year.
Don't let the small uptick in earnings from last year's $1.32 showing scare you away. Considering the fact that the company's bottom line is absorbing the IPO shares this year, it is hard to deny that this might very well be a steal at just seven times expected 1998 earnings.
The risks? Despite the fact that El Ni�o spared the resorts, that may not necessarily be the case with the human climate if an economic slowdown comes to pass. For now consumer confidence is booming and vacation rentals are hot properties. By all means, take a closer look at Trendwest, but pack an umbrella and keep your eyes peeled for any gray clouds that may appear on the horizon.
-Rick Aristotle Munarriz
([email protected])
Check out the Daily Trouble Message Board!
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