Bluegreen Corp (NYSE:BXG)

Bluegreen represents a compelling opportunity to invest in business trading at a discount to asset value, with unappreciated cash generating power and numerous options for additional upside. The stock is a discount to valuation trading at 25% its unlevered FCF and has transitioned much of its business to recurring revenue streams. Even in poor receivable performance and no growth scenario, this is a 7.50+ stock with a bunch of free options.

Bluegreen’s primary income streams can be described in 4 parts:

1. Interest Income/Finance Operations – Bluegreen earns interest on outstanding timeshare note receivables (avg rate of ~16%). These receivables are then securitized (into what was previously off balance sheet but are now consolidated VIEs) that pay 5-8%, allowing Bluegreen to earn a considerable spread. I’ll address the credit quality of those receivables below.

2. Resort Management– Bluegreen earns resorts management fees from the HOAs at its resorts, the majority of this income is contractual with a portion of the revenues here being usage driven. This is a pretty high quality business in that Bluegreen has a steady income stream and the likelihood of the HOA switching managers is negligible in my view although theoretically possible (it hasn’t ever happened and Bluegreen sits on the HOA as long as it holds any inventory).

3. 3rd party sales – Bluegreen has increasingly focused on this business as it is immediately cash generative and does not rely on Bluegreen’s ability to factor receivables. Bluegreen uses its considerable sales/market infrastructure and to move inventory on behalf of smaller timeshare developers in exchange for commissions. I would not view this as a very high quality business deserving of a premium multiple in itself with Bluegreen’s primary competitive advantage being its established sales and marketing force in its geographies.

4. Sale of Bluegreen Owned VOI Inventory

Valuation:
I arrive at a price target of $7.50 share based on a series of what I view as conservative assumptions, essentially assuming no growth from current 2010 run rate levels and poor notes receivable performance:

-$215m of 2011 Gross Sales (this is below the $240M the business did in 2010)

-10% of Sales Reserved immediately for doubtful accounts (again well above historical norms and particularly punitive given heightened credit standards)

-Resort Management Fees and Commission Sales Revenue of $65M and $50M respectively both below 2010 levels with no growth thereafter

-Expenses flat with 2010 levels – no benefit for G&A savings which have been taken in the Bluegreen communities part of the business (I also assume no sales in that Business so it continues to lose money)

-Finance Operations – Assume interest spread of $50M in 2011, which is again below run rate of $65M for 2010, as I assume there is another 20% write-down in receivables (above what was take in Q3). This decreases interest income and I assume there is no payment back to the company even though after discount receivables remain $25M in excess of the non-recourse debt.

-2011 Unlevered FCF of $105 driven by business performance on all 3 segments and a decline in non-securitized N/R balance (lower sales than the past and increase in % paid in cash) and a decrease in the inventory balance as the company is selling down its vast inventory to get in-line with normalized levels

-DCF Assumptions: 12%, 6x Exit (likely light – the management stream is a 10x biz in my view), 50% discount on restricted cash balance which is held in VIEs.

Bluegreen Corp (BXG) is a provider of vacation and residential lifestyle choices through its resorts and residential community businesses.

BXG fits my three ten criteria in a big way. Actually, it's rated number one stock (the best stock) based on my three ten.

However, I'm not quite sure how to feel about this stock. It's volume of shares traded is very low making it a very risky play (yes, there are stocks I too consider risky).

I also once read that BXG is a shady company.

The fact that BXG was steadily going down from 2005 to 2009 when it hit $1 (it was at $25 in Feb. of 2005) doesn't help either.

Having said all of this, I still think my three ten deserves to be trusted.
Let's see what happens.