And management asserted that it would continue buybacks. According to CEO Colin Reed, “We are serious that this company trades, we believe, well below what it should trade at. And we will continue to deploy our free cash flow into the equity of this company until we are satisfied that this company is being valued where it should be.” Just moments prior, Reed had said, “Until our multiple trades at or above the median for this industry, it makes no sense to me to go get all excited about going and buying some hotel in Timbuktu that doesn’t have the same cash-flowing qualities and physical features that these assets that we own have today.” That’s a discipline that I love to see in my companies, and now we’ll watch to see if management continues that discipline.
And what happens when buybacks are off the table? It implies the possibility for dividends to increase at an above-average rate.
But there are several more sources of value here. The company’s credit rating was boosted three notches recently, and the company is working on refinancing for the long term at historically low rates. In addition, at the end of the month the stock will be added to REIT indices, which will likely cause further buying. Finally, the company has other valuable assets that could be monetized: the Grand Ole Opry, a country radio station, and Ryman auditorium.
In sum, we could see a stock price of $60 based on multiple expansion to 14 times EBITDA up to $66 based on a yield of 3%.
Risks
I don’t foresee huge operational or business risks here. The company has good visibility into its operations, though a suddenly deteriorating economy could derail projections some. But 2012 occupancy of 73% is well below 2007’s 78%, meaning revenues could expand if the economy improves.
My larger concern here is the notable presence of activist investors, because if they move out, the stock could quickly fall. GAMCO owns 11.4% of shares, Paulson owns 8.2%, JANA Partners owns 4.5%, Marcato Capital owns 3.6%, and Gabelli Funds owns 1.6%. That’s quite the contingent of sharp minds focused on this stock, with many acquiring the stock in the low- to mid-$30s. If they sneeze, Ryman catches a cold. Their presence in the stock bears watching.
Foolish bottom line
With multiple exciting catalysts, Ryman looks like a great special situation. On the next market day, I’ll be buying $2,000 of Ryman Hospitality in my Special Situations portfolio.
The article I’m Putting Real Money on Ryman Hospitality originally appeared on Fool.com and is written by Jim Royal.
Jim Royal has no position in any stocks mentioned. The Motley Fool recommends Pebblebrook Hotel Trust. The Motley Fool owns shares of Pebblebrook Hotel Trust.
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