It has not been an easy 2020 thus far for hotel owners and operators. The COVID-19 pandemic has caused unprecedented damage to air travel and tourism, and the hospitality industry is no exception. With widespread lockdowns and border closures, many people have canceled their tour bookings and postponed holiday trips. Hilton Hotels (NYSE:HLT), an owner and operator of more than 6,000 hotels and resorts in 118 countries, has been similarly hit.
The diversified hotel chain's stock has tumbled by around 29% year to date, and although it has bounced off the lows witnessed in mid-March and early April, the uncertainties surrounding the pandemic may continue to hit the company hard.
With lingering pessimism and a dark shadow still hanging over the hospitality industry, is Hilton's stock a buy?
Major disruption to operations
Hilton's first-quarter earnings, which ended on Mar. 31, were not fully indicative of the damage caused by the coronavirus. The main impact from January to February was in the Asia-Pacific region, while hotels in the U.S., Europe, and the Middle East saw a negative impact from March onwards as the pandemic swept the globe. Around 12% of Hilton's global hotel properties faced complete or partial suspension of operations during the reporting period.
As of May 4, approximately 950 hotels -- or 16% of Hilton's global hotel properties -- had experienced suspensions. Though 210 hotels that were previously suspended had been reopened. For the first quarter, overall occupancy rates have dipped by 14.3 percentage points to 56%, while RevPAR (revenue per available room) declined by a steep 22.6% to $76.16.
The numbers look set to deteriorate further during the current quarter as April and May have seen more hotel closures and suspensions. CEO Chris Nassetta mentioned during the company's earnings conference call that he believes that systemwide RevPAR plunged by roughly 90% in April.
No liquidity crisis
Investors' first worry would be centered on whether Hilton can survive this potentially drawn-out crisis. With occupancy rates and RevPAR plunging to levels unseen for decades, Hilton needs to be equipped with sufficient liquidity and cash resources to tide through this crisis.
A glance at the company's balance sheet as of March 31, 2020, shows cash and cash equivalents of $1.7 billion along with total debt of around $9.5 billion. Though debt levels may seem high, the company has already reduced cash burn by lowering executive salaries, furloughing nearly two-thirds of its corporate workforce, and eliminating non-essential capital expenditures.
As a precautionary measure, Hilton drew down the remaining amount under its credit facility to boost cash reserves, and successfully executed a bond offering, too. All these measures boosted the company's pro forma cash position to $3.8 billion, which the CEO believes is sufficient to get the company through the crisis.
Gearing up for the upturn
There are tentative signs of a recovery, though. China, one of the earliest countries to get hit by the virus, has seen a sharp rebound in occupancy rates from 9% in early February to approximately 40% as of May 4. Though occupancy is still way below pre-pandemic levels, this number is an encouraging sign that demonstrates pent-up demand for hotel stays.
Moreover, Hilton is not standing idly by. With modified operating standards to be the new normal after the pandemic has passed, the hotel chain is gearing itself up for the eventual recovery. The company launched its CleanStay program in late April in alliance with Lysol producer Reckitt Benckiser (LSE:RB) and the Mayo Clinic to offer guests a safe and sanitary stay at its hotels.
Even while the company is preparing itself for the eventual upturn, investors should remember that leisure travel and holidays are, after all, a discretionary expense. With people around the globe facing job losses and financial hardship, they may not have the capacity or propensity to spend. Vacations may have to be postponed indefinitely, thus piling more short-term pressure on the hotel industry.
A slow but steady recovery
The hotel industry will probably face significant short-term pressure from the lockdowns and changes in operating procedures and regulations, all in the name of ensuring the virus is properly contained. Hilton is no exception and investors need to brace themselves for weaker numbers in the interim.
However, we believe most of the negative news has already been priced in, and the shares look attractively priced after the decline. Hilton's reputation, track record, and wide range of hotel properties put it in a unique position to weather the storm better than its weaker competitors. Management is also readying the company for an eventual recovery in travel and holiday demand, though it may take anywhere from 18 months to a few years to get back to pre-pandemic levels.