On Jan 2, we upgraded our recommendation on leading hotelier, Wyndham Worldwide Corporation (WYN), from Neutral to Outperform following its better-than-expected third-quarter 2013 results and increased earnings guidance.
Why the Upgrade?
Amid a challenging economic environment, Wyndham has succeeded in posting solid top-line growth and higher earnings for the past three quarters, driven by strong performance across all the three operating segments.
The company comfortably surpassed the Zacks Consensus Estimate for both revenues and earnings in the past two out of three quarters. In the recently concluded third-quarter 2013, Wyndham’s earnings grew 25% year over year to $1.41 per share, benefiting from higher top line, improved EBITDA (earnings before interest, taxes, depreciation and amortization) and lower share count. Quarterly revenues also increased 13% year over year. Solid growth in all the operating segments aided the quarterly sales.
Following a better-than-expected performance in the third quarter, the Zacks Rank #2 (Buy) company raised the 2013 earnings guidance for the second time in a row. The company now projects adjusted earnings per share within the range of $3.78–$3.80 up from prior expectations of $3.66–$3.76.
Reasons for the Positive Bias
Along with the strong third-quarter results, the company’s growth story looks attractive. Wyndham is engaged in offering individual and business customers a range of hospitality services across various accommodation alternatives and price ranges through its premier portfolio of 20 global brands.
With the economy beginning to improve gradually, system-wide occupancies in North America appear to be pretty steady and above the prior peak achieved in 2006. According to Smith Travel Research, the U.S. supplies are expected to be nearly 1.1% in 2014. With a low supply growth environment, the company will be able to raise its room rate, going forward.
Wyndham derives a substantial chunk of revenues from its vacation ownership or timeshare business, which has a solid long-term potential. This fee-for-service business reduces capital requirement, resulting in higher free cash flow. The company is focused on rebalancing its portfolio by increasing contributions from fee-for-service businesses, thus introduced a new initiative, Wyndham Asset Affiliation Model (:WAAM) in 2009.
We believe the company’s back-to-back acquisitions, substantial development pipeline and significant international exposure will boost growth, going ahead. Moreover, regular share repurchase activity and dividend distribution helped augment investors' confidence in the company.
Other Stocks to Consider
Investors interested in the hotel and lodging industry may consider stocks like Home Inns & Hotels Management Inc. (HMIN), Orient-Express Hotels Ltd. (OEH) and Hyatt Hotels Corp. (H). While Home Inns & Hotels and Orient-Express Hotels sport a Zacks Rank #1 (Strong Buy), Hyatt holds a Zacks Rank #2.