As far as recessions are concerned, 2020 is no run-of-the-mill downturn, and the travel industry has been one of the hardest-hit sectors of the economy. Even Hilton Worldwide's (HLT -0.21%) asset-light business model focused on franchise and management fees has been blasted, and the company unsurprisingly halted its dividend payment this year to help manage the cash crunch.
Nevertheless, this hospitality and accommodations leader is on solid footing, and with shares down 20% in 2020 year-to-date, Hilton looks like a solid bet on an eventual rebound in travel.
New trends in the hospitality market
The COVID-19 pandemic has created a new dynamic in the world. Travel will (eventually) come roaring back, as there is likely to be some pent-up demand for vacations. Business travel, though, is less certain. Videoconferencing has taken the place of many face-to-face meetings, and it's possible services provided by the likes of Zoom Video Communications will permanently reduce demand for some business trips going forward.
Adding to the complexity of the situation is new competition from Airbnb and other sharing economy accommodation services. The convergence of events didn't bode well at the start of the crisis, and sure enough, Hilton reported just a 39% occupancy rate through the first six months of the year (compared to 74% in 2019) -- including just 22% occupancy during the spring quarter. Some Hilton properties reported a dismal single-digit occupancy rate in the second quarter, like the luxury Waldorf Astoria at just 6.6%.
As it offloaded direct ownership of many properties a few years ago, though, Hilton is doing okay financially. Revenue was down 47% through the first half of 2020 to $2.48 billion, but net losses were a modest $412 million. When using adjusted earnings (which excludes non-cash items like depreciation), Hilton remained in the black with $38 million in net income -- including a loss of $170 million in Q2. It isn't pretty, but things could certainly be worse, and with the world slowly opening up again, Q2 is likely to be the low point for the iconic hotel powerhouse.
A decent bet on the return of travel
Hilton's balance sheet also puts it in a good position to mount a recovery. Total debt at the end of June 2020 was $10.6 billion, and cash and equivalents totaled $3.5 billion. Just over $7 billion in debt net of cash actually fell from the $7.45 billion at the start of the year. It isn't the greatest balance sheet around, but Hilton is far from going under anytime soon.
The timing of travel opening up again in full is, of course, the million-dollar question, but this global brand should do well once the recovery gets rolling. It boasts more than 6,200 properties in 118 countries, and it has built a sizable loyalty program via Hilton Honors with more than 108 million members. The direct booking tool could go a long way in helping Hilton scoop up a share of travelers post-pandemic, and will help it stave off upstart competition and generate higher profit margins versus bookings through a third-party website. With novel coronavirus under control in some countries, Hilton could soon start reporting a rally in revenue and its bottom line.
And the fact that Hilton remains profitable can't be understated. Activity or lack thereof at franchisee and managed properties will most certainly continue to affect Hilton's income, but largely foregoing ownership and related expenses makes this a far more nimble company than a typical real estate play. Over the trailing 12 months, Hilton's free cash flow generation (revenue less cash operating expenses and capital expenditures) was positive $1.5 billion on revenue of $7.25 billion. This figure will likely deteriorate as effects from COVID-19 persist, but it nonetheless demonstrates the strength of the business overall.
As of this writing, Hilton stock trades for just 16.6 times trailing 12-month free cash flow. As the world will bear deep scars from the pandemic, patience will be required with this hotelier. But this looks like one cheap stock in the travel industry if you're interested in playing the long game.