Hilton Grand Vacations Due For Grand Reality Check
May. 15, 2017 2:54 PM •
HGV Summary Analysts upgrading HGV are not considering the 'dark side' of this industry.
Potential liabilities can spring up anytime that can change this tune.
Angry customers complain, which can soon become lawsuits, with deleterious consequences.
There's no dispute that Hilton Grand Vacations Inc (NYSE:HGV) has been doing well over the past few weeks. But, and it's a big but, most of this buying has been fueled by analyst reports, such as this one:
Nomura reiterated their buy rating on shares of Hilton Grand Vacations Inc in a research note published on Friday morning. The brokerage currently has a $43.00 price target on the stock.
We all know how this goes; a huge Wall St. bank has to unload a fund position so they ask their buddies in the analysis department to publish a buy or hold rating on the issue which they know will be good for a few points. Of course it doesn't always happen that way, but the conflict and potential for conflicts should not be ignored by investors. Many investors already don't pay attention to what the analysts say, or else Seeking Alpha wouldn't be so popular!
First let's look at the price over the past near term:
It's clearly been on a bull run; but based on what? Well, according to an article recently published right here at Seeking Alpha, the numbers look pretty good:
HGV's total number of "club" members stands at approximately 270,000 which is up 8% from the 250,000 members reported for 2015. This increase in club members would seem to indicate continued growth of new owners and less reliance upon sales to existing owners, an issue facing the industry. This growth can also translate into higher revenues in the larger profit margin, fee based transactions of the Club Management and Resort Operations segment.
As for the financial results, total timeshare revenue was up $82 million or 6.3% to $1,390 million, for the year, but behind the $137 million or 11.7% increase between 2015 and 2014. This year over year decrease in growth appears to be due to the continued implementation of their "Fee-for-Service" or sales commission based inventory sourcing model, which ultimately drives lower top line revenue while trying to preserve the same bottom line profit margins. This is clearly evident in the decline in growth of Timeshare Sales.
For 2016, Timeshare Sales grew only 4.0% compared to 13.6% for 2015, but HGV saw strong year over year growth in both Resort Operations at 15.0% and Financing and Other at 9.2%.
Overall Timeshare expense was $948 million for 2016, up 5.7% year over year, but showed declines in growth from 2015 to 2016 with Timeshare sales expense showing a significant drop of 14.2 percentage points. Because of this, adjusted EBITDA, was $381 million, up $29 million or 8.2% for the year and ahead of the $15 million or 4.5% increase between 2015 and 2014.
But these are numbers from the past, and it doesn't capture what's really going on in the timeshare industry. Just Google 'timeshare' and look the news that pops up. You'll see things like "7 ON YOUR SIDE UNCOVERS THE SMART WAY TO BREAK AWAY FROM YOUR TIMESHARE":
Owning a timeshare can take you around the world. But disowning your timeshare can get you a giant runaround. "Frustration. Goose egg. Attitude," said Orlando Brooks of D.C."Bills in the mail," said his wife Deborah.
The Brooks have enjoyed their four timeshares over the years. Yes, four! The Mihms of Ashburn have one timeshare in Virginia Beach, but now that they are in their late 80s, they don't want to travel much anymore. "In the old days, we fell for everything," said Jan Mihm, a petite woman with a sweet giggle. The Brooks are afraid, they still do. On their last trip, yet another timeshare salesman lured them away from the resort where they were staying, and wowed them with his stunning retreat. The salesman wined and dined them, drove them around, seemed to befriend them, and then offered a deal they couldn't refuse.
Words like 'lured' are not inspiring when describing a robust business model. In the growth numbers referenced by the Seeking Alpha article, how many of these new customers were 'lured' into timeshares by tricks and other means, and how many really wanted to just buy a timeshare?
For those who don't know - a timeshare is when you buy a slot of 'time' (usually one week) at a particular resort, at a high cost. How much do they really cost? According to industry sources:
Large timeshare sellers are reluctant to be upfront about cost. The American Resort Development Association (ARDA), a trade group for timeshare companies, said in 2012 that the average cost of a timeshare is around $19,000, with an annual maintenance fee of $660.
But the bad news; timeshares are obligations, not investments. They are the opposite of the gift that keeps on giving, they are the perpetual obligation that finally will be passed on to your heirs. Yes, that's right – timeshares will be passed on to your children. And more bad news - it isn't always possible, to just 'get out' or 'sell' your timeshare (contrary to what the salespeople will tell you).
We outlined some of these issues generally in a recent article "Are Timeshare Stocks A Ticking Timebomb" and it seemingly went unnoticed.
The point is that it would be possible to write a thousand page article outlining the fraud and various unscrupulous practices involved in this industry, including but not limited to serious potential anti-trust violations, securities act violations, and fraud.
Hilton Grand Vacations Inc is clearly not the 'worst' timeshare company out there, and by having the Hilton brand (NYSE:HLT) attached to them, it seems they have a certain panache that the others don't. But at the end of the day it's still a timeshare. On Wall St. they say 'you can't put lipstick on a pig' and it's no more appropriate than here.
But is Hilton Grand Vacations Inc really any different than any of the other timeshare companies out there?
See this from consumer reports:
Misleading marketing department. I purchased a 4 day 3 night with Hilton Grand resorts and each time I tried to use it there were never any accommodations. Finally, I realized this wasn't going to work and requested a refund. Hilton refused to give me my money back stating my time had expired. if I wanted to reinstate it. I could pay an additional 30 dollars to reinstate it and use it within three months.
And a customer so angry, he decided to open his own blog and write about the problems:
In most cases where business is conducted by knowingly using false information, the transaction is considered illegal. The Department of Housing and Urban Development (HUD) utilizes the Federal Program Fraud Civil Remedies Act of 1986 to remedy issues in case of false claims. Over all, we will lose around $10,000.00 plus lots of time lost because of this fraudulent scam. Furthermore, in the complaint forum quoted below, one of Hilton's former employees (Mike of Orlando, FL) agrees that they lie in order to make a sale. But because of the clause in their contract, it doesn't appear that you can do much about it if you got caught up in this scam. Attorneys agree that the clause in the contract is not ethical. And they tell us it will cost more money to go to court than the timeshare is worth. This is scary considering the Tennessee Consumer Protection Act clearly condemns the behavior we are experiencing with the Hiltons.
In the real estate business, misrepresentation and lies of this kind are considered fraudulent. Furthermore, the United States Department of Housing and Urban Development is actively utilizing Fraud Civil Remedies Act of 1986 to protect themselves from fraud having to do with false claims. You may find this information by searching "Fraud Civil Remedies Act of 1986" or at this link: < gao.gov/assets/590/587978.pdf >.
While we are civilians, the Hilton is bound to perform under the laws of federal housing agencies; thus the Hilton may have committed fraud against the government of the federal housing agencies by utilizing an agent that broke the fiduciary requirements as a real estate agent of the Hilton. Because this is a fraudulent transaction, the Hilton could also be deemed to have committed a crime against the Federal Housing Finance Agency's regulations as banks and lending institutions are required to follow certain regulations for financing purposes.
If you are not in a position to lose thousands of dollars, then you will want to avoid purchasing a timeshare from Hilton. The timeshare presentation situation that they give in exchange for a cheap vacation is a serious attempt to scam you.
The fact is, one doesn't need to dig deep to see the complaints, problems, and frustrated customers who have no way out of their perpetual obligations to pay for something they may or may not actually use (in many cases, cannot use). For example you wouldn't find such complaints against a company like Amazon (NASDAQ:AMZN) or Apple (NASDAQ:AAPL); or to be fair too.
The fact is that the timeshare 'industry' is based on a model which has slipped through the cracks of time, under the noses of various regulators. But that doesn't mean it will always stay there. All it takes is one big whistleblower.
Obviously, that hasn't happened yet to Hilton Grand Vacations Inc , but that doesn't mean it won't. Logically, just because it hasn't happened is not a guarantee that it never will happen. The risk is there, the issues linger - and will continue to do so.
Another point; if all the customers who were 'lured' into their timeshares were simply refunded (for example, due to a class action lawsuit) would the model continue to be profitable?
Current cases are often not public, so let's take a look at just a few of the lawsuits/charges against in the past few years.
For example, see this $17 Million whopper due to aggressive robo-calling:
Orlando-based Hilton Grand Vacations timeshare was hit with a $17 million lawsuit over robo-calls - a widespread practice that on Thursday prompted the government to release new rules protecting consumers.
The timeshare company, a subsidiary of Hilton Worldwide, allegedly made 11,450 auto-dial robo-calls to numbers owned by Telephone Science Corp., which specializes in blocking and identifying robo-calls.
Company owner Aaron Foss is using a federal law that allows people or companies to sue anyone that targets them with unwanted robo-calling. The law allows $1,500 damages for each call if the violations were willful.
What is interesting about this case, at the time Hilton Grand Vacations was still a part of the Hilton brand , and has since then been spun off into it's own. But the case goes on, only in March of 2016 a settlement in the form of a fine was announced by Governor Cuomo of New York State:
Governor Andrew M. Cuomo today announced a settlement agreement between the State and Hilton Grand Vacations Company, LLC over unsolicited telemarketing sales calls, in violation of the New York State Do Not Call Law. These calls were made to consumers whose telephone numbers were validly registered on the Do Not Call Registry. The company agreed to pay a settlement in the amount of $250,500 and change business practices before continuing to make such calls to New York consumers.
"New York State created the Do Not Call Law to ensure that residents who opt out of receiving promotional calls are not forced to deal with these harassing messages," Governor Cuomo said. "This settlement will serve as a reminder that companies who violate this law will face consequences and that our administration will continue to protect New Yorkers from these unfair tactics."
And in January of this year (2017) a judge ruled that Hilton Grand Vacations cannot escape prosecution for their blatant violation of consumer privacy: Law360, New York (January 4, 2017, 5:28 PM EST) -- A Florida federal judge on Tuesday refused to allow a Hilton Worldwide Holdings Inc. subsidiary out of a proposed class action accusing the company of violating consumers' privacy by using an autodialer to place prerecorded telemarketing calls, ruling the individual who brought the suit properly pled her claims. U.S. District Judge James D. Whittemore said he would not dismiss Melanie Glasser's Telephone Consumer Protection Act claims against Hilton Grand Vacations LLC, a subsidiary that offers resort timeshares for consumers, because she properly pled her claims under the law, according to the order. However, according to Judge Whittemore, Glasser's claims meet the standard for concrete injury under the TCPA. He added there is no need for her to allege she answered the calls.
The lawsuits are piling up. The complaints, there are just too many to reference in a single article. Just Google any negative words with 'Hilton grand vacations' such as 'fraud' 'scam' 'complaints' and you'll see a deluge of complaints. True, many of these 'complaints' have not yet become lawsuits. But as we referenced previously - some have. The complaints are simply a sign that in the future, more lawsuits can be filed. See another bright example here:
I feel that we have been misled and taken advantage of by "The Hilton Club" and its New York based Managing Director of Business Operations, Mr. Albert Sanchez. Mr. Albert Sanchez has not responded to my letter of December 17, 2012 which, as a courtesy to a Hilton Club owner, should be mandatory for his position. If Hilton would like to solve my complaint they should contact me in writing, not by telephone. My wife and I have been trying to get our "investment" money out of this despicable contract since we realized that it was a scam. Hilton Grand Vacations should not be allowed to continue operations until its' questionable, and likely, illegal methods are brought to a higher standard. Therein lies the problem for Hilton as they probably would not survive if they operated in an ethical manner.
Mr. Sanchez was very direct in his support of staff and their methods. He denied that Hilton operates its programs by scamming its potential clients and owners. The high standards that Mr. Sanchez believes Hilton abides loses some validity when one investigates the internet.
In Surowitz v. Hilton Hotels Corp, "the complaint alleged that (Hilton) had defrauded stockholders and illegally depleted corporate assets to enrich individual defendants. The issues here are potentially very deep. An anti-trust case against timeshare companies would devastate them. More serious, potentially, can be securities violations for selling unregistered securities, which is clearly what timeshares are (like the opposite of a bond, a timeshare is a contract you have to pay forever) - meanwhile they sell this negative contract as an 'investment' in many cases. Even if it's not an investment, whatever kind of 'derivative' you consider it, it is certainly not real estate, but it's certainly a contract. A court process can decide exactly what it is, but whatever it is, it's unregulated and thus a potential regulatory red flag waiting to go off, and when it does, the stock price of Hilton Grand Vacations Inc. and most other public timeshare operations may be heavily negatively affected.
There is another exit scenario that worked for Diamond resorts.
Hilton Grand Vacations can be bought out. There's no way to gauge this - it is always a possibility. Public companies are open to a type of scrutiny and due diligence that private companies are not. Lawsuits, and related liabilities can be dealt with in a completely different way. When a public company is sued for misleading customers, or fraud - just the news of the allegations, even if later found to be false - can be devastating to the stock and thus the capital of the company. A private company however, let's the courts decide.
So a well funded company - that has millions to pay for legal teams, can protect itself much better than a public company. There is no question that the timeshare model is a dying one; it is flawed. It needs to drastically change, reform, or die out. Does that mean the companies like Hilton Grand Vacations will cease to exist? Of course not - simply that the model will change. The question for investors, how much of this 'flawed model' is built into the current valuation of 's 3Billion + Market Cap.
Well, let's look at the revenue, they earn about $400 Million per quarter, or about 1.6 Billion per year. According to ARDA, the timeshare industry group - timeshares in general have 83% satisfaction rate. So, that means there is at least 17% of timeshare owners are dissatisfied, for whatever reason. We can use a simple calculation here to say that if 83% are satisfied, we can bet that the same 83% of the revenues are based on real, happy, satisfied customers. We should take a haircut, to consider the liabilities of the 17% of angry customers, as they've been charged for many years for services they were for whatever reason displeased with. What is the haircut? Let's say an additional 13%; given the nature of the claims here (it would be simple to settle, just pay back all the money they received from the 17% for the past few years - or the more likely scenario fight them in court, but at what cost?). This comes out to a round 30%, which we can mark down on the revenue and stock price too. That would mean the current price of 36 would be 26; ironically, this is what the stock was trading at in January of this year (2017). So when we put it like that, it doesn't look so bad for Hilton Grand Vacations however, it still is a short opportunity, and a chance for the longs to take their profit.
The conclusion is that if you own it, sell it. If you want a short opportunity, go short, or buy puts. There's plenty of better opportunities in the market, companies with robust business models that aren't based on vapor.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in HGV over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.