Marriott Vacations has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 5.4% to $89.11 per share while the index has gained 10.3%.
Is now the time to buy Marriott Vacations, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
We're swiping left on Marriott Vacations for now. Here are three reasons why you should be careful with VAC and a stock we'd rather own.
Why Do We Think Marriott Vacations Will Underperform?
Spun off from Marriott International in 1984, Marriott Vacations (NYSE:VAC) is a vacation company providing leisure experiences for travelers around the world.
1. Weak Growth in Guests Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like Marriott Vacations, our preferred volume metric is guests). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Marriott Vacations’s guests came in at 1.55 million in the latest quarter, and over the last two years, averaged 1.4% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Previous Growth Initiatives Haven’t Paid Off Yet
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Marriott Vacations historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 5.3%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Marriott Vacations’s $5.29 billion of debt exceeds the $197 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $728 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Marriott Vacations could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Marriott Vacations can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Marriott Vacations, we’ll be cheering from the sidelines. That said, the stock currently trades at 12.3× forward price-to-earnings (or $89.11 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better investments elsewhere. We’d suggest looking at a top digital advertising platform riding the creator economy.
Stocks We Would Buy Instead of Marriott Vacations
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