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Hello CIO Corner subscribers. It has been a few years. I'm going to get back to making short posts again related to stocks I'm researching. This first post is about timeshare companies and Hilton Grand Vacations (HGV) in particular. Why are timeshare stocks so cheap? I was reading 1 Main Capital's Q2 letter, and they brought up Hilton Grand Vacations. Yaron has an excellent track record, so I thought I'd dig into the idea a little further:  Returns almost as good as ours =) HGV has a market cap of $3.5b and according to Yaron, $750m in 2026 adjusted FCF... making the stock look outrageously cheap. But I've followed the industry off and on over the years, and it's always been "cheap"... this post will get into why. Background and valuation comparison Timeshare companies used to be part of the larger hotel firms. Hilton Grand Vacations was owned by... you guessed it, Hilton. But the hotel companies decided post GFC that they all wanted to focus on the "capital light" side of the business, focusing on owning the brand itself and licensing its use to other companies. This meant spinning off the timeshare businesses. Today, the hotel companies trade at massively different valuations. As you can see from the table below, the brand owners trade at 30-40x PE ratios, whereas the timeshare companies trade for 8-13x PE ratios, a massive discount to the brand owners and even to the average stock in the S&P 500.  Yes I made this image with ChatGPT Reason 1: Organic growth The data on organic growth at HGV is a bit hard to untangle, because they have acquired multiple companies over the years, paying $3b for Diamond Resorts in 2021 and $1.5b for Bluegreen in 2024. Removing these deals, it seems like their organic growth has been in the extremely low single digits, with EBITDA increasing from about $395m to $500m on the high end from 2017 to today:  This table too In contrast, HLT adjusted EBITDA has doubled from 2017 to today. So the difference in organic growth is massive, about 600-700 bps per year. In fact, HGV's acquisition strategy around rebranding shows the difference between the organic opportunities for the two companies. When HGV acquired Diamond Resorts and Bluegreen Vacations, they made rebranding the properties to "Hilton Vacation Club" a key part of the strategy. These properties will then get folded into HLT's royalty stream without HLT needing to do anything.  From a 2025 HGV investor deck Reason 2: Capital intensity When we look at the raw numbers on capital intensity, it is clear that HLT is much more efficient. They generate over $3b of EBIT on just $8b of invested capital, generating around a 40% ROIC. HGV's EBIT ROIC is a mere 10%. Part of that is due to the organic growth issue mentioned above: HGV doesn't grow much organically so they decided to buy it via M&A. This takes capital that could otherwise be returned to shareholders. One positive though, is that the traditional capital intensity for a hotel business -- the costs to build hotels and the capital required to maintain them, are mostly shifted onto the timeshare owners themselves. Owners pay for the construction of the hotel when they purchase their timeshare and pay for maintenance / "refresh" costs out of their own pocket on an ongoing basis via HOA fees. However, many of the timeshares are not purchased in cash, but are financed. Over 60% of customers finance their purchase, and this takes capital. HGV has more than $4b in gross timeshare receivables. But while this takes capital, the returns are compelling, with a nearly 10% spread to the interest rates HGV pays on the securitizations that fund these loans.  From their most recent 2026 deck These loans also come with default risk, at least in theory. Every year HGV has to write off a certain number of loans because the customer has stopped paying. However, defaults on VOI loans are not nearly as catastrophic as they are in residential mortgage lending. Foreclosed homes are often found in disrepair, and it can take banks years to evict in some states. By contrast, HGV can easily reclaim a VOI and return it to their inventory for resale if the owner stops paying. That being said, there could certainly come a time when interest in timeshares in general falls at the same time that existing borrowers stop repaying their obligations. In that scenario, HGV's earnings would take a significant hit. Reason 3: Customer acquisition costs For HLT, the money essentially just rolls in, as they can add another franchise to the system with little effort. HGV has to fund a massive tour operation just to get people in the door. HGV spent $1.54b on net sales and marketing expense to generate $3.3b of VOI sales in 2025. In some sense you can probably think of this expense as the true "capital" cost of the business, even if it is expensed in the current period rather than capitalized (some academics think all advertising and R&D expense should be capitalized for this very reason). Reason 4: Complexity Investors understand quite well where revenues for HLT come from: franchise fees, management fees, and normal hotel revenues. The vast majority of operating income comes from franchise and licensing fees: with HLT receiving a single-digit percentage of revenue from any hotel under its banner, HGV, by contrast, must:
Yaron's pitch shows the difficulty in tracking all this. HGV reported $756m of Adjusted FCF in 2025, but $404m of that came from net non-recourse debt activity. Cash flow from operations has been between $300-325m each of the last three years, so it's hard to know how much credit to give the company for the much larger number. This is also related to the market's general skepticism of lending business profits. Regardless of how much a company says they are earning from consumer lending (which is what the financing arm is), it is always complicated to figure out what the true through-the-cycle earnings will be on their current and future loan portfolio. For this reason, consumer lending businesses tend to trade at relatively low multiples. Reason 5: Negative perceptions Buying a timeshare is a complex financial transaction and over the years there have been various scandals in cases where customers were misled. It's just much harder for consumers to judge the long-term value of a timeshare relative to a simple hotel stay, and the extremely low resale value of timeshare interests make consumers and investors suspicious of the whole operation. I think this bleeds into the valuation. It's hard to convince investors to pay high multiples for something that many consumers feel is a scam and therefore may not be sustainable. See this reddit post as a prime example of how many consumers view it...  Bull case and conclusion Despite all of the above, there is a real bull case here. First of all, to reiterate, the stock is cheap, and there is a price for everything. My best guess is that the company does around $350m of sustainable owner's earnings based on $154m of conventional FCF in 2025 plus ~$200m of adjustment items. At a $3.5b market cap, this puts the stock at around 10x. The long-term track record of organic growth is not heroic, but is still positive, and the acquired Bluegreen and Diamond assets probably still have room for rebranding benefits and integration-related cost savings. At 10x, share repurchases -- the company did $600m last year -- can drive substantial per-share value. Time will tell, and this one is going on my watch list. Comments are closed.
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