Over the past six months, Hilton Grand Vacations’s shares (currently trading at $35.97) have posted a disappointing 13.6% loss, well below the S&P 500’s 16.2% gain. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Hilton Grand Vacations, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Hilton Grand Vacations Will Underperform?
Even with the cheaper entry price, we’re passing on Hilton Grand Vacations for now. Here are three reasons why there are better opportunities than HGV, plus one stock we’d rather own.
1. Weak Growth in Members Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like Hilton Grand Vacations, our preferred volume metric is members). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Hilton Grand Vacations’s members came in at 720,000 in the latest quarter, and over the last two years, averaged 5.3% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. 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, Hilton Grand Vacations’s ROIC averaged 4.5 percentage point decreases each year. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Hilton Grand Vacations’s $7.77 billion of debt exceeds the $272 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $1.05 billion over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Hilton Grand Vacations could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Hilton Grand Vacations can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We see the value of companies helping consumers, but in the case of Hilton Grand Vacations, we’re out. Following the recent decline, the stock trades at 6.9× forward P/E (or $35.97 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.
Stocks We Would Buy Instead of Hilton Grand Vacations
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