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05/14/2019 5:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

Life doesn’t follow a script, not even for the best-prepared people. But happy accidents can emerge when best-laid plans go awry, such as the case of Hilton Worldwide Holdings (HLT), suggests Richard Moroney, editor of Dow Theory Forecasts.

During the height of the oil boom in 1919, Conrad Hilton scoured Texas for a bank to buy. Needing a place to spend the night after a bank deal fell through, Hilton came across a dilapidated hotel and an owner looking to retire.

Hilton bought that hotel, and then several more, renovating their rooms and installing newsstands and novelty shops to boost sales and maximize use of space. In the ensuing years, Hilton Worldwide has built its company around selling its founder’s name and other brands that have come under its control, such as Hampton, DoubleTree, Embassy Suites, and Waldorf Astoria.

Under an umbrella of about 15 brands, Hilton now operates roughly 5,700 hotels and resorts in 113 countries. Hilton owns about 1% of these properties and manages about 12% of them; the rest are franchised hotels.

Hilton focuses on the midscale, upscale, and luxury travel markets. The U.S. is Hilton’s biggest geographic market, accounting for 77% of sales last year, up from 65% in 2014. Hilton’s strength is its brands — which are gaining momentum and fueling market-share gains.

In 2018, Hilton grew per-share profits 55%, sales 10%, and operating cash fl ow 36%. Free cash fl ow jumped 49% to $1 billion. Seeking to press its advantage, Hilton’s pace of expansion ranks among the fastest in the hotel industry.

Hilton opened more than 450 hotels last year and has another 2,400 in its development pipeline. More than half of those forthcoming hotels will be outside the U.S., with about one-fifth in Europe, the Middle East, or Africa.

The company has a 20% global market share of rooms under construction. Bears will note that Hilton operates in a cyclical industry known for high fixed costs and a tendency to overbuild Online platforms for vacation rentals, such as Airbnb, also present increasing competition.

Despite these risks, and the late stage of the current economic upswing, we like the stock. Hilton generates most of its business from licensing its name to franchises, which requires a low asset base and capital investment. Additionally, long-term contracts with costly termination fees give Hilton some protection from downturns.

Hilton Worldwide  grew March-quarter earnings per share 16% to $0.80 excluding special items, surpassing the consensus by $0.04. Revenue advanced 6% to $2.2 billion.

Looking ahead to the June quarter, Hilton forecasted profits climbing 40% to 47%, bracketing analysts’ growth target of 44%. Management also raised its full-year profit guidance.

Hilton shares aren’t cheap. However, Hilton looks timely, given its scores above 85 for Momentum, Earnings Estimates, and Performance. Hilton is a Long-Term Buy.

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