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Marriott Vacations Worldwide (VAC)

This resort company beat earnings estimates by four cents in the last quarter, and analysts expect double-digit growth rates into the near future. The stock has been pressured in the recent market sell-off, and now presents an opportunity to buy at a discount.

Marriott Vacations Worldwide (VAC)
from Game Changers

We’re adding Marriott Vacations Worldwide (VAC) to the Game Changers portfolio.

We’re eyeing this little-known timeshare and resort management company because it offers us stability in an uncertain market and because we believe the market is significantly mispricing the stock at its current levels.

Marriott Vacations Worldwide is the result of Marriott International (MAR) spinning off its timeshare business in late 2011. The company markets and manages timeshare and vacation properties in the United States, the Caribbean, Europe and Thailand, and it recently purchased a property in Australia. As luxury consumers and the general public increase their vacation spending and economies generally strengthen, it makes sense that the company is seeing strong results across its lines of business.

After breaking through its previous support the stock has settled around a new level of support. With potential catalysts rapidly approaching, I expect it to rebound from this support in the coming weeks. As a result of this recent decline, the stock is now trading at valuations not seen in its nearly four years of trading.

The company reported fully diluted earnings per share, EPS, of $0.91, up 4.6% from the same quarter of last year. Revenue was slightly lower than expected, roughly $423 million instead of the forecasted $424 million.

This hardly warrants the 9% decline in price we saw following the news. In fact, the only piece of information I can tie that decline to is the subsequent S-8 in which the company disclosed the issuance of 500,000 shares for its employee stock purchase program. Since 500,000 shares represents only a 1.6% increase in the total share count, I don’t consider the sell-off to be warranted.

For the stock to sell off by 9% seems like a miscalculation by the market in reaction to something that I view as a long-term positive for the company. For this to kick off a 28% decline in the stock’s price seems like an opportunity for us to pick up shares on the cheap.

Here are the three major catalysts that will drive the stock higher in the coming months:

Catalyst 1: October 15 Earnings Report

With the next earnings report due out on October 15 and the stock trading at depressed levels, this is the next stock-moving catalyst that we’re watching. The company has beaten EPS expectations three out of the last four quarters, and in the quarter in which it did not beat expectations, it still reported $0.81 per share compared to a forecasted $0.82 per share. Even if the company doesn’t beat expectations, I expect the earnings report to send shares back towards the previous positive trend and towards the previous trading range. The company is forecasted to boost EPS by 18% in 2015 and 18.5% in 2016.

Catalyst 2: Inclusion in the S&P 500

It is a very reasonable possibility that Marriott Vacations Worldwide will be added to the S&P 500 in the next year. With a market capitalization of $2.14 billion, the company is already bigger than Joy Global (JOY) and approximately the same size as Consol Energy (CNX) – No. 500 and No. 499 on the S&P, respectively. At its pre-earnings report valuation of $2.94 billion, Marriott Vacations Worldwide would take the No. 495 spot in the S&P 500.

Catalyst 3: Capital Return

Marriott Vacations Worldwide paid its first dividend in Q4 of last year. With its current dividend of $0.25 per share per quarter as well as its earnings per share of $3.24 over the past year, the stock has a payout ratio of around 31%. I would not be at all surprised to see the company announce a dividend increase during its next earnings report.

Shares of Marriott Vacations Worldwide stock are down 28.25% since the company’s most recent earnings report, roughly $26 per share. For the stock to reclaim its previous share price it will need to climb roughly 40%. I fully expect the stock to make this move as well as benefit from a pop associated with S&P listing, an increase in EPS associated with increased share repurchases and/or an increase in market participation and valuation thanks to dividend stability and potential dividend increases.

Ian Wyatt and Jay Taylor, Game Changers,, 866-447-8625, September 30, 2015