The hotel industry was among the hardest hit by the coronavirus pandemic, but you probably already know that as you think about the vacations and weekend getaways you've had to cancel or put off in the past year. People are itching to start traveling again, but the pandemic has not subsided and has even surged in recent months. However, there is hope that the pandemic will be brought under control this year, with several new vaccines now approved for distribution. This development, along with an improving economy, should help hoteliers like Hyatt Hotels (H -0.38%) begin their journey to full recovery.
Hyatt underperformed its competitors in 2020, with the stock price down 17% on the year. But at its current low valuation, it could be an attractive buy in advance of the travel industry's recovery. Letʻs take a closer look at what factors might make Hyatt stock a buy going forward.
Image source: Getty Images.
Upscale funk
Hyatt underperformed in 2020 primarily because its properties are heavily skewed toward the upscale, upper-upscale, and luxury segments of the market. These segments have struggled with much lower occupancy rates and revenue per available room, or RevPAR, than midscale, small-town/suburban, and interstate properties. Hyattʻs hotels are also found in locations that did not fare well in 2020 -- cities, resorts, and airports. And Hyatt caters heavily to group meetings and business travel, a revenue segment that has all but dried up lately.
On the third-quarter earnings call, CEO Mark Hoplamazian explained:
We continue to see near-in group business cancellations consistent with what we saw last quarter and have now seen meaningful cancellations in the first quarter of 2021 group business. While the impact on second quarter 2021 business isn't nearly as significant yet, we are starting to see cancellations and believe we may experience additional attrition over the coming months. Large group business demand is heavily linked to confidence around widespread vaccine availability, effective therapies, and scalable rapid testing solutions.
By comparison, most of Hyattʻs competitors, such as Marriott, Hilton, Wyndham, InterContinental, and Choice Hotels, have a broader portfolio of rooms and properties. Thus, they had more diverse revenue streams and were able to generate more profit from the better-performing segments.
European vacation?
There are some reasons for optimism, though. Two of the companyʻs newest brands, Hyatt Place and Hyatt House, have performed well relative to its other brands, with occupancy rates in the mid-40% range. This is higher than the industry average, and RevPAR that's only slightly down year over year.
Also, the company continues to expand. In the third quarter, it opened 27 new hotels, a record for the third quarter. Further, it is expanding its presence in Europe with plans to open 20 new hotels on the continent, along with 12 new hotels in the U.S.
Hyatt has maintained strong liquidity to easily sustain itself while investing in new opportunities if the tough times continue, which they likely will for another couple of quarters. It has $1.8 billion in cash and cash equivalents, and $3.6 billion of available liquidity, not including proceeds from a $750 million short-term bond issuance in the third quarter.
When the travel market does make the turn back toward growth, Hyatt should be in a good position to soar. A surge in pent-up demand for meetings, business travel, and its upper-end properties would give it an advantage relative to its peers as RevPAR and average daily rates should outpace its more diversified rivals. Right now there's just too much uncertainty, and the stock price could still drop lower over the next few difficult quarters. The stock looks a little overvalued, with a price-to-earnings multiple of 22 and a price-to-sales multiple of 2.4. I like its long-term prospects and would hold on to it if you own it, but would wait a few quarters to buy to see how things shake out.
