We are upgrading our rating on Wyndham Worldwide Corporation (WYN), a hospitality company engaged in offering individual consumers and business customers a range of hospitality products and services, to Outperform from Neutral.
The rating upgrade is based on second quarter 2010 earnings, which were well ahead of the Zacks Consensus Estimates, primarily driven by better-than-expected business in Vacation Exchange and Rentals. Additionally, Wyndham is experiencing a surge in demand with a gradual recovery of the global economy. Business travelers are returning, with leisure demand increasing as well. Wyndham also raised its fiscal year 2010 outlook.
Going forward, we expect Wyndham to benefit from its repositioning to a more fee-for-service based business and strategic focus on Vacation Exchange and Rental business. Moreover, with lower cash taxes, we expect the company to generate a strong free cash flow and return the capital to shareholders.
Second Quarter Results
Wyndham recorded second quarter 2010 earnings of $95 million or 51 cents per share, well ahead of the Zacks Consensus Estimate of 41 cents per share and the company’s previous guidance of 38 cents per share to 42 cents per share. The increase was driven by better-than-expected business in Vacation Exchange and Rentals, along with a lower effective tax rate and the favorable net effect of foreign currency. The company is also seeing improving business momentum in North America. In the year-earlier quarter, Wyndham earned $75 million or 41 cents per share on an adjusted basis.
Total revenue spiked up 5% year over year to $963 million in the quarter under review, reflecting the sales momentum in each of Wyndham’s three business units. Revenues also outpaced the Zacks Consensus Estimate of $937 million.
The best segment performer was Vacation Ownership, as revenues climbed 8.1% from the prior-year period while sales from Gross Vacation Ownership Interest soared 13%, owing to a 16% increase in volume per guest in the backdrop of relatively flat tour flow.
During the quarter, Wyndham also acquired the Tryp hotel brand, which included 92 hotels – or 13,200 rooms – in Europe and South America.
Outlook Raised for 2010
Wyndham raised its full-year 2010 outlook. The company expects adjusted earnings to range from $1.78–$1.88 per share compared with its prior guidance of $1.56–$1.71 per share. For the third quarter of 2010, Wyndham expects adjusted earnings per share to be in the range of 60 cents to 64 cents.
For full-year 2010, management raised its revenue guidance range to $3.7 billion–$4.0 billion from its prior guidance range of $3.6 billion–$3.9 billion. Adjusted EBITDA is expected to remain in the range of $825 million–$860 million compared with the prior guidance of $805 million–$840 million.
Earnings Estimate Revisions: Overview
Following the second quarter earnings release, the Zacks Consensus Estimate for the company has been on the rise, with the analysts remaining bullish on the stock. The strong second quarter results bolstered the analysts’ confidence. The earnings estimate details are discussed below.
Agreement of Estimate Revisions
A positive inclination can be witnessed among the analysts, who mostly remain bullish on Wyndham. Revision trends in the last 30 days drifted toward the positive side. For fiscal 2010, 7 out of 6 analysts covering the stock raised their estimates and for fiscal 2011, 7 out of 5 analysts have increased their estimates. None of the analysts has reduced their estimates.
The analysts have increased their estimates based on strong second quarter results and increased fiscal year guidance by the company. Moreover, the analysts expect the company to generate a robust free cash flow and deploy the cash to shareholders via dividends and share repurchases. Additionally, the analysts foresee further declines in lower loan loss provisions in the timeshare business as the year unfolds. However, there has been no movement in estimates by the analysts regarding their outlook on Wyndham over the last 7 days.
Magnitude of Estimate Revisions
Earnings estimates rose 1 cent to $1.70 for fiscal 2010 and remained unchanged at $1.89 for fiscal 2011, over the last 30 days. In the last 7 days, the Zacks Consensus Estimate for fiscal 2010 increased by 15 cents to $1.85 and was up 9 cents to $1.98 for 2011.