The leisure and lodging industries look to be big growers for the coming years, and Hyatt Hotels (H 3.96%) is at the forefront of the picture -- but is it worth the rich valuation? In yet another impressive earnings release, the hotel giant posted a clean double on its profit and came in well ahead of analyst expectations. The future looks just as good if not better, but what about the forward earnings multiple of more than 36 times? It's clear that value-seeking investors will make a quick decision on this stock, but are growth investors getting at least a fair price on the company's future earnings potential?
Hyatt has the industry's wind at its back, but is posting even stronger numbers than its peers. Revenue, occupancy, room rates, and profit are all on the upward swing and should remain so in the foreseeable future.
Adjusted EBITDA grew more than 20% in Hyatt's fourth quarter, to $178 million. Net income more than doubled from $0.09 per share in the fourth quarter of 2012 to $0.20 per share in the just-ended year's quarter. The boosted numbers weren't a result of one-time gains, but real organic growth across all fronts.
Systemwide hotel RevPAR (revenue per available room -- a unit level measure of sales growth) grew a very healthy 4.2%. Again, the reasons were organic -- higher room rates and greater occupancy levels.
Interestingly, it is mainly the United States that is driving growth. While many other businesses and industries are finding sluggishness here, Hyatt sees strength. Still, the company remains committed to international expansion. Hyatt is opening company-owned locations and increasing its management and franchise business, expanding from Mexico to Nebraska to the Asia-Pacific region.
The management and franchise fees segment is Hyatt's strongest performer. While owned and leased hotel revenue grew 7.7%, fee revenue grew nearly 18% to $94 million. Obviously, the bulk of Hyatt's earnings come from its own hotels, but the management and franchise segment is a capital-light, cash-flow-generating business that will continue to meaningfully contribute to the bottom line for years to come.
The road ahead
Hyatt management sees things growing at a similar level, and possibly more, in 2014, with another 40 hotels expected to open in the year. Leading the growth will be the United States, where management again forecasts similar or improved occupancy levels.
The thing is, many of the top hotel chains are targeting big-time growth in coming years. Marriott International (MAR 1.49%) has even more ambitious plans for its new room growth (144,000 in the pipeline), and trades at only 21.8 times earnings. Both companies have a history of delivering appealing return on invested capital and are focusing the bulk of cash flow on expansion. Hyatt seems to be growing its sales, earnings, and cash flows at a higher rate than Marriott, but the valuation premium is tough to stomach.
For investors who want exposure to the hot space, Marriott may be a better option to consider.