Share price: $78 Target price: $96
Position size: 2.5% 1 yr return: -11%
Hilton beat on revenue and EPS. 2019 EPS and EBITDA guidance better than expected despite lowered RevPAR guidance range from 2-4% to 1-3%. This new lowered RevPAR guidance was largely expected and is in line with other hotel operators. EBITDA was $544m, ahead of guidance and consensus. RevPAR for 4Q was +2% driven entirely by higher rates. Q1 guidance also ahead of expectations. While RevPAR guidance is weakening, Hilton is structurally different than it was last cycle – asset light means less operating leverage and less volatile earnings stream if RevPAR continues to weaken. Moreover, unit growth will aid EBITDA growth regardless of RevPAR trends. (RevPAR = revenue per available room. It’s their total room revenue divided by their total number of rooms).
[MORE]
Key takeaways:
· Their weakest areas of demand were leisure travelers in the US and Asia Pacific.
· Group business is solid – 2019 group bookings up in the mid-single-digits and corporate negotiated rates up just over 2%; slightly ahead of last year’s growth. More than 70% is already on the books.
· On 2% RevPAR growth in 4Q, they grew EBITDA 12%.
· Net unit growth – In 2018 they opened more than one hotel per day – the best year of openings in their history. They added over 450 hotels (+57K rooms) or approximately 7% growth YoY. They ended 2018 with 5,700 properties and 913K rooms (~5% global room share) across 113 countries.
· Strong pipeline for 2019 – record year for construction starts and signings. They are expecting to grow rooms 6-7% in 2019. 80% of that is under construction. >50% of pipeline is outside of the US.
· Launched new luxury brand, LX. The first hotel opening under this banner is in Dubai and is a conversion from a contract Marriott lost last year.
· Loyalty members hit 85m and account for 60% of system-wide occupancy. Goal is to have 100m members by the end of the year.
· China RevPAR was weaker than expected at +5% – it had been trending up double digits. They echoed other companies in saying that the macro environment in China is weakening. Despite that, management had a very positive tone about the future of their operations in China.
· Conversions (an existing hotel changes their banner to Hilton) increased from 20% of pipeline to 25%. This can be a little counter-cyclical. It peaked as a % of their pipeline in the recession in low 40% range. They are starting to see a ramp in conversions in China.
· Returned $1.9B to shareholders in 2018.
· The stock is undervalued, trading at over an 8% FCF yield on 2019.
Investment Thesis:
∙ Hotel operator and franchiser with geographic and chain scale diversity of 14 brands, 5,400 hotels and 880k rooms across 106 countries (Hilton, Hampton Inn & Hilton Garden Inn ≈ 2/3 of portfolio).
∙ Network effect moat of leading hotel brand and global scale lead to room revenue premiums and lower distribution costs.
∙ Shift from hotel ownership to franchising results in resilient, asset-light, fee-based model.
∙ Record pipeline generating substantial returns on minimal capital will lead to increasing ROIC and a higher multiple.
∙ Unit growth and fee based model reduce cyclicality – Lower operating leverage vs ownership reduces earnings volatility and unit growth offsets potential room rate weakness.
∙ Generating significant cash which is returned to shareholders through dividends and buybacks.
$HLT.US
[tag HLT]
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109