Wednesday, November 24, 2010

Silverleaf Golden?

Silverleaf Resorts (SVLF) markets and operates timeshare resorts. The raw stats on Silverleaf are enough to excite any value investor. The company has a P/E under 5, a P/B of 0.2, and a P/S of around 0.15. Furthermore, the company continues to generate a profit throughout this downturn.

But it's no longer March of 2009, so a company trading at such a low price must be spooking investors in some way. In the case of Silverleaf, it is the company's high debt levels in relation to questionable receivables that worries investors. The company has tangible equity (mostly in the form of notes receivable from customers to which it has sold timeshares) of $200 million, and debt of $400 million.

The good news is, the debt owed is staggered in its maturity dates, and much of it isn't due for several years. The bad news is, the receivables are due over several years as well. Silverleaf takes about a 10% down payment from the would-be vacationer, and then spreads the remaining payment over the next 5-7 years.

As such, the situation is a bit of a black box for shareholders, as we don't know how well the customers are going to be able to make their payments, and the leverage employed further clouds the situation. In this way, Silverleaf operates a little bit like a bank, which makes it very difficult to value. It is a well-capitalized "bank", but it is also an un-diversified one, as it caters to just one group: low-end consumers willing to accept annual interest rates in the teens. This is a group that is particularly vulnerable in a weak economy. The loans to customers are, however, secured against the timeshare which can then be flipped to someone else, which does provide some protection to shareholders. (For further discussion of the company's customers, see here.)

With such a low stock price, the company might be better served sitting on its hands and collecting payments it is already due. But that is not what's going on. Perhaps due to vacancies at the company's properties (i.e. a high inventory number), management continues to push sales. But to market the company's inventory of timeshares, the company has to spend money now, while most of the cash from customers isn't received for many years. This situation dries up liquidity and explains why the company's debt position is not really improving, despite the paper profits.

So is management just trying to keep its job, or is there some scale to be achieved by filling up the company's properties? The answer to this question may lie in the company's proxy filing, which details who owns the company's shares. In this case, the CEO owns 25% of the company, suggesting his incentives are aligned with those of shareholders. Nevertheless, there is much uncertainty clouding this company's future due to the long-term nature of receivables, the customer groups Silverleaf sells to, and the leverage employed to finance these future receivables.

Disclosure: None

1 comment:

Anonymous said...

I couldnt remember where I had heard of this company before..but it finally rang bell. Michael Burry wrote about this stock in 1999:

Amusing coincidence!