Share Price: $96 Target Price: $105
Position Size: 2.9% 1 Yr. Return: 18%
Hilton beat on revenue ($2.5B vs $2.4B) and EPS ($1.06 vs $1.02, +23%). Full year RevPAR guidance lowered as global macro trends weaken. Despite that, EPS guidance was increased, demonstrating the strength of their high incremental margin, fee driven business. On 1.4% RevPAR growth in 1Q, they grew EBITDA 11% – again ahead of the high end of guidance and consensus. While RevPAR is weakening, they are outpacing peers and their model is a lot less dependent on macro driven RevPAR growth and much more pipeline dependent. Their pipeline growth is not slowing and has some countercyclical aspects. 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. They’ve already returned almost $800m YTD.
Key takeaways:
· RevPAR of 1.4% (this was the mid-point of guidance) outperformed the industry for the 6th consecutive quarter. RevPAR increase driven by increases in both ADR and occupancy.
· Full year RevPAR guidance lowered to 1-2% from 1-3% as their broad macro outlook has weakened.
· Solid net unit growth continue to drive strong performance. Net unit growth of 7% is running ahead of originally targeted 6.5% for the year. Current pipeline of 373k rooms represents 40% unit growth. With expected annual growth of about 6%, this is several years’ worth of growth with about half of it already under construction. >50% of pipeline is outside of the US. And 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).
· 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.
· 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.
· Their model is resilient because their pipeline is their growth driver.
· China is seeing weakness – their Chinese business is largely driven by Chinese domestic leisure travelers – these consumers are being negatively impacted by the trade war. Ongoing protests in Hong Kong are also having an impact.
· Loyalty members hit 94m from 89m 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 ~6.5% FCF yield on 2019.
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