Over the last six months, Marriott Vacations’s shares have sunk to $54.74, producing a disappointing 15.8% loss - a stark contrast to the S&P 500’s 15.3% gain. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Marriott Vacations, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.
Why Do We Think Marriott Vacations Will Underperform?
Even though the stock has become cheaper, we don't have much confidence in Marriott Vacations. Here are three reasons why VAC doesn't excite us and a stock we'd rather own.
1. Decline in Guests Points to Weak 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 1.5 million in the latest quarter, and over the last two years, averaged 1.5% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Marriott Vacations might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability. 
2. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. On average, Marriott Vacations’s ROIC decreased by 1.6 percentage points annually over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Marriott Vacations’s $5.65 billion of debt exceeds the $474 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $750 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
Marriott Vacations doesn’t pass our quality test. Following the recent decline, the stock trades at 7.9× forward P/E (or $54.74 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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