Bigger Is Better When It Comes to Hotel Investing

The largest hotel operator in the US is a great investment for its size and growth.

Apr 25, 2014 at 3:49PM

If there's one name in hotels that everyone knows, it's Hilton Worldwide Holdings (NYSE:HLT). Hilton is now the largest publicly traded hotel company in the U.S. after its IPO earlier this year. But shares are flat since the company's debut. However, with a potential turnaround in the domestic lodging cycle, Hilton could be worth a closer look.

Why Hilton still reigns supreme
Hilton has a strong brand name with worldwide recognition. It has a portfolio of 10 brands, including Hilton, DoubleTree, Embassy Suites, and Hampton Inn. Hilton was taken private in 2007, and since then it has managed to lighten its debt load while also increasing the number of its locations by more than 40%. The hotel operator also has a strong international presence. About 60% of its pipeline is international compared to only 20% in 2007.

But more than three-quarters of Hilton's earnings before interest, taxes, depreciation, and amortization are generated in the U.S. The U.S. remains one of the more stable markets for hotel operators. It's also already seeing a more meaningful rebound than Europe and other markets. So, Hilton's exposure to the U.S. is a net positive. The other positive for Hilton is that it has a broad range of mid- and upper-tier brands; Hilton's mid-tier brands should see increasing demand as the economy continues to rebound.

One of the more exciting opportunities for Hilton is to shift towards an asset-light model. This involves moving more to a franchise model versus a hotel-ownership model. And with Hilton's strong rewards program (HHonors), which is quickly approaching 40 million members, Hilton has been able to raise its franchise fees with virtually no push back from franchisees.

Ultimately, the shift to an asset-light model will permit Hilton to generate a higher return on capital while also allowing the company to carry lower debt. This type of shift should allow Hilton to continue trading at a premium valuation to peers.

Is there value to be found in other hoteliers?
Despite its size, Hilton is still one of the growth stories of the industry. Analysts expect earnings to grow at an impressive 22.5% annually over the next five years. However, a couple of other hotel operators might appeal to income-seeking investors (Hilton doesn't pay a dividend). Starwood Hotels & Resorts Worldwide (NYSE:HOT) offers a 1.8% dividend yield. And Wyndham Worldwide (NYSE:WYN) pays a dividend yielding 1.9%.

As far as Starwood Hotels goes, it's right there with Hilton when it comes to size. Starwood Hotels has more than 1,000 hotels spread across 100 countries. The nice thing about Starwood Hotels is that it's positioned nicely to benefit from a turnaround in international markets.

Wyndham is a bit different. It not only has hotels but also manages vacation properties. With its exposure to the vacation market, Wyndham has even more leverage to the rebounding economy than Hilton and Starwood.

How shares stack up
Hilton trades with a premium valuation to its peers, trading at a P/E of 28 based on next year's earnings estimates. Wyndham trades at a 15 P/E and Starwood at 24. This points to Hilton as one of the better growth stores in the industry. Of the 22 Wall Street analysts following Hilton, none have a sell rating.

As far as Wyndham's steep discount to Hilton and Starwood, it's for a reason. Wyndham has inherently more risk given its exposure to the vacation and exchange & rental market, especially in Europe, where this part of the market remains very weak.

Bottom line
Hilton is making the shift toward an asset-light business model, which should help reduce the amount of debt the company carries as well as boost margins. For investors who would like to play the rebounding economy, hotels are a great way to do so. And in this space, Hilton's worth considering on a pullback.  

The greatest thing Warren Buffett ever said
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

Marshall Hargrave has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers