Vistana (VSTN)

Vistana sells and finances timeshare arrangements and books 100% of its revenue and income on the sale once 10% of the cash has been received. As a result, revenue and income are heavily front-loaded while the actual cash flow related to the sale, the remaining 90%, trickles in over the following 7-10 years. As a result, Vistana cash flow is negative every year even though it is reporting strong earnings growth. This gives it an inherent problem. The company must maintain its high rate of growth to sustain its stock price, however the higher growth causes a bigger cash flow deficit. That makes this negative-cash-flow company dependent upon external borrowing to keep the trend going, and it also needs external funds to finance expansion of its real estate facilities. We warned our clients about VSTN in our May 1998 issue. The company was able to keep the story alive long enough to be acquired in late 1999 by Starwood Hotels & Resorts, Inc. (HOT). VSTN stock fell more than 20% before being acquired.

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