Share price: $92 Target price: Raising to $105 from $96
Position size: 2.9% 1 yr return: 17%
Hilton beat on revenue and EPS. Revenue rose 6% to $2.2B. EPS was $0.80, +16% vs consensus $0.75 (guidance was $0.73-$0.78). System wide RevPAR grew 1.8% on a currency neutral basis, in line w/ full year guidance of +1-3%. EBITDA was $499m, ahead of the high end of guidance and consensus. As a result, full year EPS and EBITDA guidance was raised. They still expect system-wide RevPAR growth to increase 1-3%. They reiterated their plan to return $1.3-$1.8B in capital to shareholders for the year, equating to 5-7% of current market cap.
Key takeaways:
· Both system-wide and US RevPAR grew 1.8%, outperforming the chain scale weighted industry data due to strong market share gains across all brands and major regions.
· Mgmt points to market share gains as a leading indicator of what should happen with their network effect because that attracts more capital. It’s why you see the pipeline growing and rooms under construction growing. Last year was the first time in history they grew market share everywhere in the world, including the US.
· Group business continues to be solid with RevPAR up 3.7%
· On 1.8% RevPAR growth in 1Q, they grew EBITDA 12%.
· Net unit growth of 7% is running ahead of targeted 6.5% for the year.
· Development pipeline grew to 371k rooms from 364k rooms last quarter – equates to 40% of room count. Over half of pipeline is under construction.
· >50% of pipeline is outside of the US.
· 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 89m from 85m last quarter and account for >60% of system-wide occupancy. Goal is to have 100m members by the end of the year.
· The stock is undervalued, trading at 7.5% FCF yield on 2019.
· ESG: ranked number one on Fortune’s Best Companies to Work For list in the US – the first hospitality company in history and the first non-tech company since 2004 to achieve this number one rating.
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