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Strategies & Market Trends : Timeshare Companies - OWN FFD TWRI VSTN SVR BXG

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To: Michael Burry who wrote (23)	5/25/1999 8:01:00 AM
From: Grommit	Read Replies (2) of 55

Financing the business... . So what happens when the company sells through its inventory and has maxed out its borrowing of 85% against accounts receivable at some reasonable level? The company's sales will basically crash. Correct me if I am wrong in understanding your message. Sounds like you are saying that since this industry can only "collect" 85% of revenue, it is like having a 15% sink on the cash flow. With numbers -- When they sell $100 million, they might have profit of $8 million, but only collect $85 million of the revenue with the financing. So they are digging a hole of $7 million (perhaps), I think you are saying. I think you could do this for most any business and say that the cannot afford to fund their growth. If a manufacturer makes 10% profit, for example, with COGS at 50% of revenue and turns of 4, he has a similar problem. All profits need to go into working capital and his growth is limited by his financing. He has a working capital sinking fund which taps all the profits and limits growth to 5%-10%. Very rarely do I hear the argument that financing is the constraint for growing a profitable company. Only when valuation are absurdly low perhaps, and even then they can usually float some type of security. I have to believe that this industry would be able to finance itself since profitable. If not, the downside might be that they sell out to deeper pockets (like hotels), and not crash and burn. I have a summary in front of me for 6 companies in the sector. It's a year old -- summarizes ratios for year end 1997. The EBITDA is over 23% of revenue. Net income is 8%. Not sure what that means, but it is important. :o) In this qtr conf call for one of these companies they were asked about financing and growth. They said they could continue to grow at 20% rate without additional financing. But if they raised additional funds they could grow faster. I think this relates directly to your analysis, but this company said that the limit is 20% growth. Let me know if I am paraphrasing you incorrectly. Thanks for posting here.

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