Hilton Grand Vacations: Weak Q2 Results Increasingly Reflected In Valuation (Rating Upgrade)

Core Viewpoint - Hilton Grand Vacations (HGV) has underperformed in the stock market, losing 22% of its value over the past year, and recent financial results indicate ongoing challenges that warrant a cautious outlook [1][5]. Financial Performance - In Q2, HGV reported earnings of $0.62, missing expectations by $0.43, while revenue increased by 23% year-over-year to $1.2 billion, largely due to the Bluegreen acquisition [2][3]. - Adjusted EBITDA was $262 million, up 5.6% from last year, but the company faced a significant increase in interest expenses, rising to $87 million from $44 million, which outpaced EBITDA growth [2][3]. - The company experienced a decline in adjusted EBITDA margins, contracting by 310 basis points to 21.5% due to rising sales and marketing costs, which increased by $117 million to $453 million [3]. Consumer Behavior and Market Conditions - Management noted a pullback in consumer spending towards the end of the quarter, with timeshare purchases being highly discretionary, influenced by squeezed real incomes and elevated borrowing costs [2][3]. - Consumer delinquency rates are rising, leading to a provision for financing losses of $95 million, up from $41 million a year ago, indicating increased credit risk [3][4]. Financial Policy and Debt Management - HGV executed $100 million in share repurchases in Q2 and an additional $46 million in July, with $114 million remaining under its authorization, despite elevated debt levels [4]. - The company has a corporate debt of $4.9 billion at a 6.85% average interest rate, with a debt/EBITDA ratio of 4.5x, which is considered high [4]. Valuation and Investment Outlook - The current valuation of HGV at nearly 12x earnings appears aggressive given the pressures on the business, especially in comparison to similar companies in the consumer finance sector [5]. - The company is moving to a "hold" rating as the stock has underperformed the market by about 20%, and further evidence of business stabilization is needed before considering a buy [5].