Should Investors Pay Attention to the La Quinta IPO?

Lodging is a great space considering the rising values of real estate, occupancy rates, and franchise business models. Should this week's IPO be a part of your portfolio?

Apr 8, 2014 at 3:02PM

IPOs are the hottest they've been in several years, and this week marks another round of businesses stepping out onto the public platform. As many Fools know well, buying into that hyped-up initial offering can often make for quick losses, but there are exceptions to every rule. One IPO of interest this week is in the consistently improving lodging space. With juggernauts such as Marriott International and Hilton posting better and better financials every quarter, the industry is a hot one. This chain was public as recently as 2006, and after a going-private transaction, it's ready to come back. Is La Quinta an IPO worth watching?

Rinse and repeat
The owner of La Quinta is private equity giant Blackstone (NYSE:BX), and the former's IPO this week will mark the third lodging business that Blackstone has taken public in just six months (Hilton and Extended Stay being the others). This doesn't mean Blackstone is trying to leave the lodging industry at warp speed, but rather that its restructuring efforts are paying off and allowing the company to make big money. Plus, industry tailwinds are as strong as they've been in some time.

Though all three hotel chains have their respective demographics, the strategy used for each was quite similar: shifting from real-estate-oriented businesses to franchised ones. Investors should feel encouraged immediately, as the franchise model is simply more favorable (though less income-generating for investors): The company has less in the way of upfront costs and payroll expenses, and instead leverages its brand name and collects royalties. All of the other hotel chains mentioned above lean toward the model as well, especially the ones Blackstone brought public.

Looking back is no guarantee of what's ahead, but the model is working in addition to strong industry trends -- mainly higher occupancy levels and room rates.

Is it a good deal?
While the operating model is prime for investment, the terms of the IPO are not quite as friendly. At the top of the offering range, La Quinta shares would sell for $21 per share, implying a valuation of $2.57 billion. Compared to their most recent year's earnings, that's a trailing P/E of more than 50 times. Hilton, which priced at the midrange of the prospectus, has stayed nearly flat since its December debut at a trailing P/E of 47 times. Industry giant Marriott, which has booked a 50% gain in two years, trades at a trailing P/E of roughly 28 times.

La Quinta has the elements to be a great investment, but it's priced too high. Wait for this one to simmer down a bit, and then take another look at the compelling story.

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