Marriott Vacations trades at $68.63 per share and has stayed right on track with the overall market, gaining 29.1% over the last six months. At the same time, the S&P 500 has returned 32.7%.

Is there a buying opportunity in Marriott Vacations, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.

Why Do We Think Marriott Vacations Will Underperform?

We're cautious about Marriott Vacations. Here are three reasons we avoid VAC 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 1.51 million in the latest quarter, and over the last two years, averaged 1.2% 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. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative 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 5.5%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.

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 $5.39 billion of debt exceeds the $205 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $778 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 9.5× forward P/E (or $68.63 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. Let us point you toward an all-weather company that owns household favorite Taco Bell.

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