Although Wyndham (currently trading at $85.36 per share) has gained 6.1% over the last six months, it has trailed the S&P 500’s 12.4% return during that period. This may have investors wondering how to approach the situation.
Is now the time to buy Wyndham, 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.
Why Do We Think Wyndham Will Underperform?
We’re sitting this one out for now. Here are three reasons why there are better opportunities than WH, plus one stock we’d rather own.
1. Weak RevPAR Growth Points to Soft Demand
In addition to reported revenue, RevPAR (revenue per available room) is a useful data point for analyzing Consumer Discretionary – Travel and Vacation Providers companies. This metric accounts for daily rates and occupancy levels, painting a holistic picture of Wyndham’s demand characteristics.
Wyndham’s RevPAR came in at $38.53 in the latest quarter, and over the last two years, its year-on-year growth averaged 2.9%. This performance was underwhelming and suggests it might have to invest in new amenities such as restaurants and bars to attract customers – this isn’t ideal because expansions can complicate operations and be quite expensive (i.e., renovations and increased overhead).
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).
Wyndham historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 11.8%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.
3. 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).
Over the last few years, Wyndham’s ROIC averaged 4.7 percentage point decreases each year. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Wyndham doesn’t pass our quality test. With its shares underperforming the market lately, the stock trades at 16.9× forward P/E (or $85.36 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are more exciting stocks to buy at the moment. We’d recommend looking at the Amazon and PayPal of Latin America.
