Shares of Hilton Worldwide Holdings Inc. HLT are riding high on its robust earnings surprise history, RevPAR growth and expansion strategy. Consequently, the stock has gained 27.8% year to date, outperforming the industry’s rally of 18.9%. However, intense competition and cyclical nature of the industry are concerns. Let’s delve deeper.
Unit Expansion Drives Growth
In a bid to maintain its position as the fastest-growing global hospitality company, Hilton continues to drive unit growth. During the first quarter of 2019, Hilton opened 85 new hotels. It also achieved net unit growth of 10,000 rooms, indicating roughly 41% increase from the prior-year quarter. During 2018, Hilton launched more than 450 hotels, taking the room count to more than 66,000, and achieved net unit growth of nearly 57,000 rooms, marking an increase of 10% from the same period of 2017.
As of Mar 31, 2019, Hilton's development pipeline comprised more than 2,480 hotels, with more than 371,000 rooms across 108 countries and territories, including 37 countries and territories, where it currently does not have any running hotels. Moreover, 200,000 rooms in the development pipeline were located outside the United States and 193,000 rooms under construction.
Robust Loyalty Program – A Bright Spot
Hilton has created one of the largest loyalty programs, Hilton Honors. With nearly 90 million members, this network has created an extremely valuable asset for the company. In 2017, it added more than 11 million members to the program. Further, in 2018, more than 14 million members were added to Hilton Honors. In the meantime, innovations such as the Hilton Honors app continue to drive growth in the program. In addition to being the company’s fastest growing and lowest cost-distribution channel, this app, rolled out in December 2017, also enables a differentiated customer experience. In fact, the loyalty program boosted occupancy in 2018 by 20%. The Honors now accounts for roughly 60% of system-wide occupancy, which is up 170 basis points for the year.
Estimates Trending Upward
Let’s look at Hilton’s earnings estimate revisions in order to get a clear picture of what analysts are thinking about the company. In the past 30 days, the Zacks Consensus Estimate for the current quarter and year has declined 2 cents and 4 cents to $1.02 and $3.85, respectively.
The hotel industry is highly competitive, as major hospitality chains with well-established and recognized brands are continuously expanding their global presence. Hilton is continuously facing intense competition from both large hotel chains and smaller independent local hospitality providers. Increasingly, the company also faces competition from new channels of distribution in the travel industry.
As Hilton has outperformed the industry in the past year, the stock’s valuation looks quite stretched. The stock has a trailing 12-month EV/EBITDA ratio of 17.7, which is below the high level of 29.57 scaled in a year. On the contrary, the trailing 12-month P/E ratio for the industry and the S&P 500 is 14.97 and 10.86, respectively.
Zacks Rank & Key Picks
Hilton, which shares space with Marriott International, Inc. MAR, has a Zacks Rank #3 (Hold), at present. Better-ranked stocks in the same space include Red Lion Hotels Corporation RLH and Wyndham Destinations, Inc. WYND. Both stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Red Lion Hotels’ bottom line for the current year is likely to soar 102.2%.
Wyndham Destinations reported better-than-expected earnings in each of the trailing four quarters, the average being 5.9%.
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