Hilton 3Q Results – Crestwood Advisors

Hilton beat on EPS, missed on revenue and gave better than expected RevPAR guidance range for 2019. EBIDTA was $557m vs consensus $555. RevPAR for 3Q was 2% driven entirely by higher rates –this was slightly weaker than consensus. According to the CEO, the lower than expected RevPAR was a result of a calendar shift (adverse mid-week timing of July 4) and weather. They discussed the potential impact of this on the 2Q call. 4Q and full year guidance bracket consensus. The street seemed to be expecting a RevPAR guidance range of 1-3% for 2019, and management guided to 2-4%. Stock is down, but no change in thesis. Investors may be getting concerned it is late cycle, especially given weaker than expected RevPAR trends this quarter. Stocks can trade off in anticipation of this. However, 2019 RevPAR guidance was solid as are supply demand trends. Additionally, Hilton is structurally different than it was last cycle – asset light means less operating leverage and less volatile earnings stream if RevPAR weakens. Moreover, unit growth will aid EBITDA growth when RevPAR does weaken.

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Key takeaways:

· Stronger 2019 RevPAR guidance on decelerating supply growth and robust demand indicators.

· Group business is strong. They expect up MSD or better next year. More than 70% is already on the books.

· On 2% RevPAR growth in 3Q, they grew EBITDA 9%.

· Strong pipeline growth for 2019. They are expecting to grow rooms 6-7%. 80% of that is under construction.

· Launched urban, lifestyle micro-hotel brand called Motto.

· Development outlook: 371K rooms in pipeline. Up 11% YoY.

· Loyalty members hit 82m and account for 60% of system-wide occupancy.

· Returned $1.7B to shareholders YTD.

Key Negatives:

· Weaker than expected 3Q RevPAR. This was driven by softer leisure transient demand. This was driven by weather and calendar shift.

· Raised full year EPS guidance, but midpoint below consensus – street was already at the high end of guidance.

Valuation:

· Industry fundamentals remain strong, but HLT and other hotel operators are trading at trough valuations.

· They should do close to $5/share in FCF next year. On today’s price, that’s over a 7% FCF yield on 2019.

· Hilton is more expensive than MAR on a P/E basis, but cheaper on a cash flow basis. More importantly is that both are trading at near trough valuations on both metrics (these charts are as of yesterday).

HLT FCF Yield