Share Price: $94 Target Price: $105
Position Size: 2.8% 1 Yr. Return: 33%
Hilton beat on revenue and EPS, but lowered RevPAR guidance as global macro trends weaken. Despite that, EPS guidance was increased, demonstrating the strength of their asset light business model and strong unit growth. Given their robust development story, they are a lot less dependent on macro driven RevPAR. Their development pipeline is delivering 6-7% unit growth. On 0.4% RevPAR growth in 3Q, they grew EBITDA 9%. Additionally, their pipeline growth is not slowing and has some countercyclical aspects. They plan to return $1.6-$1.8B in capital to shareholders for the year (they’ve returned $1.2B so far), equating to ~7% of their market cap.
Key takeaways:
· System-wide RevPAR of 0.4%, driven by both ADR and occupancy.
· Full year RevPAR guidance lowered to 1% from 1-2% as their broad macro outlook has weakened.
· Saw softness in the US and Asia Pacific. US was +0.4% and Asia Pacific was -2.7% driven by weakness in China. China RevPAR was -5.6% – This includes impact from Hong Kong protests, where RevPAR was down 40%. Mainland China was down <3%.
· Issued 2020 RevPAR guidance of 0% to +1%. Expect 2020 net unit growth of 6-7% range.
· During the quarter they completed the sale of the Hilton Odawara Resort & Spa and subsequently entered into a 30-year management contract with the purchaser of the hotel.
· Solid net unit growth continues to drive strong performance. Pipeline of 379K rooms (>2,500 hotels throughout 111 countries). Over 200K of these hotels are outside the US and more than 50% are already under construction.
· Current pipeline represents close to 40% unit growth. With expected annual growth of about 6%, their pipeline is several years’ worth of growth with about half of it already under construction. More than 90% of their deals do not require any capital from them.
· Continued improvement in their market leading RevPAR index – RevPAR index is RevPAR premium/discount relative to peers adjusted for chain scale. They are the market leaders – this is helpful because it’s what leads to pipeline growth (hotel operators want to associate w/ the brand that yields the best rates and occupancy) and is helpful in a macro downturn because it’s even more crucial for a developer to be associated with a market leading brand to get financing. i.e. they would likely take more pipeline share if lending standards tighten. The other countercyclical aspect of their pipeline growth is conversions (an existing hotel changes their banner to Hilton).
· Tru is a fast growing new brand for them which management says has the opportunity to be much bigger than Hampton Inn. Hampton Inn is their largest brand with over 250K rooms. Demonstrating the strength in both new and existing brands: Tru has a RevPAR index of 130 (the highest brand premium in the industry) and Hampton (35 year old brand) has a RevPAR index of 120 – and a pipeline of more than 700 hotels.
· In a sensitivity analysis to a market downturn, mgmt. said they would expect flat to slightly positive growth in adjusted EBITDA and positive growth in free cash flow in an environment where RevPAR were to decline 5% to 6%. This is b/c 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.
· Loyalty members hit 99m and account for >60% of system-wide occupancy.
· The stock is undervalued, trading at ~6% FCF yield on 2020.
Investment Thesis:
∙ Hotel operator and franchiser with geographic and chain scale diversity of 17 brands, 5,900 hotels and 939k rooms across 114 countries (Hilton, DoubleTree, Hampton Inn & Hilton Garden Inn ≈ 80% 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