On March 6, Bluegreen Vacations (BXG) reported 2017 fourth quarter net earnings attributable to shareholders of $66.5 million or $0.93 per diluted share, compared with $25.6 million or $0.36 per share in the prior year quarter.
This year’s results contained several unusual items, including a $47.7 million ($0.67 per share) gain associated with the implementation of the Tax Cut and Jobs Act, a $2.2 million pre-tax charge (estimated $0.02 per share) associated with BXG’s corporate realignment initiative (CRI) and a $4.8 million one-time payment (also pre-tax and estimated $0.04 per share after tax) to Bass Pro Shops, a joint venture partner to settle a dispute over sales commission due. (BXG made the payment as a goodwill gesture even though it believes that Bass Pro received its appropriate share of sales commissions. It hopes to resolve the matter and get its money back soon.). Excluding these items, BXG’s estimated adjusted attributable earnings were $23.4 million and its adjusted diluted EPS was $0.32 per share.
In a previous post, I had anticipated that fourth quarter earnings would come in below the prior year level after adjusting for the expected TCJA benefit, but there were still some surprises. For one, gross sales of vacation ownership interests (VOIs) increased 5.1% in the quarter, reversing the trend of successively declining quarterly growth. This was more than offset by a surge in uncollectable VOI notes receivable, nearly double the prior year level. Thus, net VOI sales declined 3.8% in the quarter.
BXG attributes this year’s surge in its loan loss provision to attorneys who are encouraging clients to walk away when they begin to fall behind on their payments. Despite that, the percentage of delinquent notes receivable declined to 3.04% at year-end 2017 from 3.30% in 2016. If the drop in the delinquency rate continues, notes receivable write-offs should begin to decline within the next several quarters.
Offsetting the drop in net VOI sales, fee-based sales of VOIs rose, but at a slower rate than earlier quarters. Revenues from fee-based services (mostly resort management fees) were a bright spot, up 13.4%. As a result, BXG’s total fourth quarter revenues nudged up 0.5% to $167.2 million.
Yet, BXG’s total costs and expenses for the quarter increased by 7.3%. Most of the increase was due to the CRI and Bass Pro charges. But excluding those one-time items, total costs and expenses were still up 2% and BXG’s SG&A expense ratio increased by 150 basis points to 60.7%.
The decline in BXG’s fourth quarter adjusted profitability was not completely unexpected, given the strong results recorded during the first nine months of 2017 and the possible distraction of the November equity offering for management. The recent firming in U.S. economic growth, and especially the gains in employment and wages, offer a bit of a tailwind that should help BXG show further gains in revenues and profit, as long as management can execute on its strategies.
VOI inventory. BXG closed the year with $281.3 million of VOI inventory but recorded only $22.5 million in VOI cost of sales for the full year. Total inventory increased by $48.2 million or 17.9% during the year, virtually all of which was in completed VOI units.
In 2017, BXG recognized a $5.1 million benefit ($3.1 million net of tax) to cost of VOIs sold by raising its VOI’s average selling price by 4% in June 2017. This is apparently consistent with the relative sales value method prescribed for timeshare developers under accounting rules.
Excluding this $5.1 million benefit, BXG’s full year 2017 adjusted cost of VOIs sold was $27.6 million. That works out to 10.2 years’ worth of inventory, at the 2017 sales rate. Yet, the company has adopted an “asset light” business model that targets sales commissions from the sale of VOIs owned by third parties and sales of VOIs purchased from third parties on a “just-in-time” basis. In 2017, BXG also bought VOIs in secondary market transactions, paying $12.7 million to acquire VOIs with an estimated retail sales value of $243.1 million. The shift to an asset light strategy combined with the secondary market VOI purchases on top of the estimated multi-year supply of owned inventory suggests that a significant portion of BXG’s existing inventory is not readily salable and probably carried on the books at close to its salvage (or alternative use) value.
Projections. Even so, BXG’s financial performance is obviously driven by what can be sold near-term. The focus on fee-based VOI transactions and sale of VOI inventory purchased at deep discounts can drive its revenues and profits higher in 2018 and beyond (as long as economic conditions remain favorable).
I had previously projected BXG’s 2018 EPS at $1.50 per share. Based upon the fourth quarter performance, which was worse than I had anticipated primarily because of the payment to Bass Pro and higher than expected CRI charge, I have reduced my baseline 2018 forecast to $1.37 per share.
However, the adoption by BXG of ASU 2014-09, Revenue from Contracts with Customer (Topic 606), will cause BXG to restate its 2017 results, increasing reported revenues by $12.6 million (to $680.1 million), net income by $9.5 million (to $147.8 million) and EPS by $0.13 to $1.89. The increases are caused by earlier recognition of VOI revenue due to the removal of certain bright line tests regarding the determination of the adequacy of the buyer’s commitment. Although management has not provided specific guidance on the impact of ASU 2014-09 on 2018 results, I am assuming that it will increase EPS by an amount equivalent to that reported for 2017. (In theory, there should be a one-time benefit from the change in methodology only that should not be repeated, but rising unit sales could still cause a proportionately greater in revenue recognition in any given year.) Thus, my EPS projection for 2018 remains at $1.50, with $1.37 in baseline EPS and $0.13 from the adoption of the new revenue recognition standard.
Despite the shift, my baseline forecast represents a significant improvement over 2017 adjusted EPS of $1.09. (My 2017 adjusted EPS for BXG is equal to reported (GAAP) EPS of $1.76 minus the TCJA benefit of $0.67 with no adjustment for the CRI and Bass Pro charges.) Implicitly, therefore, my forecast assumes that these charges will not reoccur and that the company will achieve a 5.4% increase in revenues combined with a reduction in the ratio of cost and expenses-to-revenues of 180 basis points (bp), with most of that coming from a 240 bp decline in the SG&A expense ratio. (Management has said that the CRI program would reduce salaries and benefits by about $19.5 million, but some of that savings will be offset by increases in marketing spending; so my assumptions anticipate additional SG&A savings in other areas.
My projections also assume that BXG will generate free cash flow of $77 million or $1.03 per share in 2018, up from $51.9 million or $0.69 in 2017. Higher pre-tax profits and lower taxes (with an assumed effective tax rate of 27%) are the primary drivers behind that forecast.
Extending the forecast period beyond 2018 and holding the line on most of the forecast assumptions, my projections suggest that the company can generate significant cash flow, even after $40 million of scheduled debt payments. This probably will not happen because the company is likely to use any increase in cash flow to grow the business or return cash to shareholders. My most important (implicit) forecast assumption is that economic conditions will remain favorable, allowing BXG’s core pool of middle class potential customers to raise spending on leisure and recreational activities over time.
Valuation. In my previous report, I established a target price range of $26-$29 on BXG, based primarily on the expectation that the valuation gap between BXG and its peer group would narrow over time. Since then, even though BXG’s fourth quarter earnings were modestly below my expectations, the stock has performed relatively well, rebounding from a February swoon to a new high of $22.47 in mid-March. Over the past three weeks, BXG’s stock price has stabilized at around the $21.40 level, despite increased volatility in the broader market.
Meanwhile, stock prices for most of BXG’s peers have slipped. BXG has thus outperformed its peers in 2018, closing much of the valuation gap. At current peer stock prices, the valuation gap between BXG and its peers would disappear if BXG’s share price increases to $23-$24. I am therefore reducing my target price range to $24-$26, which suggests that BXG can still outperform its peers and probably the broader market, if it meets my expectations for 2018 financial performance. Conceivably, there is still upside beyond that target price, as indicated perhaps by the stock’s strong relative performance so far this year, provided that management can achieve low teens EPS growth over the next few years.
April 3, 2018
Stephen P. Percoco
Lark Research
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