FBR Capital Markets hosted several meetings with Chief Executive Craig Nash and investors of Interval Leisure Group Inc. (NASDAQ: IILG) last week.

Most conversations and questions revolved around Interval Leisure Group's 'good problem to have,' namely the use of its free cash flow and under-levered balance sheet, especially in light of the likely upcoming debt refinancing, said Patrick Scholes, an analyst at FBR Capital Markets.

Interval Leisure Group has consistently been generating more than $70 million of free cash flow per year over the past several years, versus a market cap of about $730 million.

Additionally, Scholes calculates year-end 2011 net debt/EBITDA at 1.0 times (0.5 times for 2012), which makes the company's balance sheet the second strongest in the gaming/lodging sector, next only to Hyatt.

Although the company repurchased 2.5 percent of its shares in the third quarter for $19 million, the management made it clear that the first priority with its free cash flow/balance sheet was to invest in the business via accretive acquisitions, similar in nature to last year's purchase of Trading Places International.

Scholes would not be surprised to see a similar type of acquisition(s) in the next two quarters. Additionally, the company suggested that a regular cash dividend could be a real possibility post-debt refinancing, which is the first time he can recall the company considering this option.

Interval Leisure Group is currently burdened with $300 million of 9.5 percent coupon senior notes issued at an 11 percent effective rate for the books that are callable next September.

Scholes believes there is a high likelihood that these notes will be refinanced next fall with an interest rate in the 6 percent to 7 percent range. He calculates that if refinanced at 6 percent, the savings in interest expense will give an 18 percent increase to 2013 estimated EPS and a 15 percent ($9 million) boost to free cash flow.

Scholes projects that if successfully refinanced at 6 percent, 2013 free cash flow yield should be above 10 percent, a yield second only to Wyndham in the lodging space.

In the third quarter, while Interval Leisure Group's earnings exceeded expectations on both the revenue and cost sides, membership growth remained challenging.

Membership levels were down 1 percent year over year; however, Interval International is expected to get a 3.5 percent bump up in membership (65,000 new members) in January 2012 due to the forthcoming affiliation with Shell Vacations.

The brokerage reiterated an outperform rating on shares of Interval Leisure Group with a price target of $19. The brokerage also maintained its 2011 EPS estimate of $0.64 and its 2012 estimate of $0.78.

Interval Leisure Group stock closed Monday's regular trading up 8.26 percent at $13.37 on the NASDAQ stock market.

NASDAQ Stock Market Management