After Marriott (NYSE:MAR) posted a 45% increase in third-quarter earnings this month, and Starwood (NASDAQ:HOT) followed two weeks later with standout results including a triple-digit rise in net income, expectations for Hilton (NYSE:HLT) were high. How high? Earnings for the company surged 79% to $64 million, or $0.16 per share (23% above estimates) -- and yet the stock is still trading lower this morning.
Some of the negative reaction may stem from Hilton's full-year guidance, which was merely in line with estimates, whereas rival Starwood recently lifted its 2004 forecast significantly above expectations. Or it could be that earnings have been skewed by a $10 million pre-tax gain, resulting from a joint-venture condominium development project that was sold during the quarter. Nevertheless, Hilton, based in Beverly Hills, is building on last quarter's solid foundation.
Third-quarter revenues of $952 million jumped 9% from a year ago to top the $1 billion mark, driven by healthy RevPAR (revenue per available room) improvements, new units, rising fee income, and continued strength in the time-share business. Occupancy levels climbed another 2.7 points to 76.7% (and reached 90% in some key markets), which coupled with a 3.5% increase in average daily rates to produce a 7.3% rise in RevPAR from comparable owned hotels. The key metrics were in line with Marriott's results but trailed Starwood, whose 8% improvement in pricing power led to a 12.3% RevPAR gain.
On a systemwide basis, growth was reported in each of the company's six brands, ranging from 4.5% at Embassy Suites to 7.6% at the flagship Hilton chain. These gains, along with the addition of 36 properties (nearly 5,000 rooms) to the system, helped generate a 17% rise in management and franchise fee revenues to $102 million. Hilton is increasingly becoming reliant on these revenues, as the company now owns only 52, or less than 2.5%, of its properties.
Hilton's vacation ownership business continues to be among its fastest-growing segments. Sales of resorts in destinations such as Hawaii and Las Vegas spiked 36% for the quarter -- with a 9% increase in the average unit price -- resulting in a 16% jump in revenues to $109 million.
Some of Hilton's financial measures have slipped relative to last quarter but remain healthy in absolute terms. One that has not fallen, however, is the company's price-to-earnings ratio, which remains in the mid-30s based on trailing earnings. Though it trades at a premium to many peers, the company has -- by retaining only a handful of properties -- strengthened its balance sheet, diversified revenues, and expanded margins. With business and leisure travel on the rise, up to 20,000 new rooms in the pipeline, and an optimistic earnings outlook, Hilton's prospects are worth a closer inspection.
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Fool contributor Nathan Slaughter recommends the Las Vegas Hilton to anyone but owns none of the companies mentioned.
