Hilton Remains Attractive Value In Crowded Hotel Industry

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Gene Marcial

Fierce competition has always bedeviled companies in the hotel and lodging industry, but more so now than ever, as agile and active competitors have mushroomed, with bed-and-breakfast and vacation rental operators taking a big bite of the market. Even so, some of the large hotel stalwarts are still the best long-term stocks to bet on in this sector.

In particular,  the rapidly expanding Hilton Worldwide Holdings stands out as an asset with a sustainable competitive advantage in this challenging industry, and its stock's cotinued rise reflects the company's performance .

In spite of the crowded business it’s in, Hilton’s intangible brand asset is the one paramount edge that, analysts say, will continue to propel the company towards increasing its already hefty market share. Hilton’s stock has steadily climbed in price all year, to more than $28 a share from $17 in January, exceeding its 52-week high of $27. Some analysts forecast that the stock will continue its ascent, to at least $33.

“We expect Hilton’s room share expansion to be among the industry’s fastest over the next decade because of an industry-leading pipeline, favorable next-generation traveler position supported by newer brands, and its highly rated (customer) loyalty program,” says Dan Wasiolek, senior equity analyst at Morningstar. In his recent note to clients, he notes that Hilton currently has a 5% share of global hotel rooms, with a 22% share of all industry pipeline rooms under construction.

Hilton’s resonating intangible brand advantage, says Wasiolek, will keep the global hotelier's competitive edge intact, particularly after an upcoming spin-off of a majority of its company owned assets and its timeshare unit on Jan. 3, 2017. He expects the major move  to improve capital allocation, reduce taxes, and further grow those segments, which Wasiolek expects should lead to enhanced shareholder value.

Cyclicality and overbuilding in the industry are the main risks for shareholders, but analysts see Hilton as best equipped to weather growing competition with its scale and persistent efforts to continue increasing new hotel brands. Hilton operates 789,000 rooms across 13 brands that address the mid-scale through the luxury segments. Hilton and Hampton are the two largest brands by total room count at around 27% each. Hilton’s managed and franchised hotels represent 92% of total rooms, notes Wasiolek. Globally diverse in its operations, the Americas region account for 80% of total rooms, while Asia Pacific totals 7%, Europe 10%, and Africa, Middle East, and Asia, 3%.

Rachael Rothman, equity analyst at Susquehanna Financial Group, notes that the positive thesis on Hilton is simple: The company after the asset spin-off "will be the fastest- growing, highest return, most defensive lodging company under our coverage.” So she has raised her price target for the stock to $31 from 26, as she believes Hilton has all the attributes and management agility and ability to continue leadership in the industry.

“We expect the high fixed-cost, low capital-intensity business model, combined with the largest unit growth pipeline in the business, market-leading brands, and best-in-class management team, to drive shares higher,” Rothman argues. True, there are many competitors that also own, manage, and franchise lodging properties, she concedes, "but none has Hilton’s combination of 14% RevPAR (revenue per room) premium, 6% square-footage growth, 5% 2017 FCF (free cash-flow) yield, and 14% to 23% earnings per-share growth.”

The great news about Hilton’s business outlook, according to Rothman, is that “90% of its revenues and EBITDA come from fees and 90% of that are tied to the top line. These low-volatility stream of fees combined with Hilton’s 6% square-footage growth help protect revenue growth, the analyst points out.
So Rothman has raised her earnings forecast for Hilton’s 2016 earnings to $1.53 a share from 87 cents, and her 2017 estimate to $1.78 from $1.11.

Large institutional investors in Hilton note that evidently the stock is a long-term play on the ever-expanding lodging and travel market, and benefit from bearing the name and brand that’s long been associated with the established leaders in the industry.

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