The Risk-Reward In Bluegreen Vacations: BofA Names It A Buy

Bluegreen Vacations Corporation (NYSE: BXG), which recently IPO-ed, was initiated by Bank of America Merrill Lynch with a top-notch rating Tuesday.

Bluegreen Vacations is a spinoff unit of BBX Capital Corp (NYSE: BBX), with the latter owning 90 percent of the former's shares, with a 180-day lock up period.

The Analyst

BofA Merrill Lynch analyst Barry Jonas initiated coverage of shares of Bluegreen Vacations with a Buy rating and $20 price target.

The Thesis

Bluegreen Vacations' capital-light business model focuses on a less-targeted middle-income consumer, Jonas said in a note. It should benefit from growing timeshare demand and expanded marketing agreements with Bass Pro and Choice Hotels International Inc (NYSE: CHH), he said. (See Jonas' track record here.) 

Bluegreen Vacations is expected to benefit from both capital-light initiatives and potential tax reform, Jonas said. But the likelihood of higher loan default is perceived as a risk, as the company's lower price point attracts a riskier demographic, the analyst said. 

BofA said the company isn't likely to generate meaningful cash flow in the near term due to increasing inventory investments. The company is being shepherded by a new CEO, although he has a lean management focus and a strong team, Jonas said. 

On valuation, the firm noted that its $20 price target is based on eight times its fiscal year 2019 EBITDA estimate, which is nearly a 200-basis point discount to timeshare peers.

"This reflects several peers trading with an M&A premium and Bluegreen's riskier core customer, despite leading EBITDA growth in 2018E." 

The Price Action

Bluegreen Vacations had a rocky start to its Wall Street debut, as the shares closed the debut session Nov. 17 at $13, a 7-percent discount to the offer price of $14. Since then, the shares have moved above the offer price.

At the time of writing, the shares were advancing 1.30 percent at $16.32.

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