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Hilton (HLT) Continues to Gain From Solid Business Model

Zacks

On Nov 10, we initiated a coverage on Hilton Worldwide Holdings Inc. HLT.

The company exhibits solid long-term growth potential given various sales-building initiatives which can help counter near-term macro headwinds.

Capital-Light Business Model

In January 2017, Hilton completed the spin-off of Park Hotels & Resorts, Inc. PK and Hilton Grand Vacations Inc. HGV, resulting in three independent, publicly traded companies. On the same day, the company put the previously announced 1-for-3 reverse stock split into effect. All these developments are expected to make Hilton a fee-based, capital efficient and resilient business, with enormous growth potential worldwide.


Post the split on Jan 4, the company’s shares have rallied nearly 25.2% while the S&P 500 market gained 14.2%.



In fact, the focus is expected to be on driving market share, units, free cash flow as well as maintain the company’s strong balance sheet and accelerating return of capital. Further, as Hilton’s unit growth is mostly financed by third parties, the company is capable of generating substantial returns on minimal capital investment.

This asset-light model is expected to help shareholders receive high returns on invested capital. In fact, Hilton expects to return between $1 billion and $1.1 billion to shareholders through buybacks and dividends in 2017. This, in turn, reinstates our faith in the company’s strong fundamentals and cash flow position.

Strong Loyalty Program

Hilton has created one of the largest loyalty programs, Hilton Honors. With about 70 million members, this program is an extremely valuable asset for the company. In fact, about 57% of all occupancy per night takes place through this program.

Additionally, Hilton recently announced a partnership with American Express (Amex) in a bid to drive demand. Starting November, Amex launched and will be marketing a portfolio of Hilton Honors credit cards in the United States, which will help drive the program’s membership and enhance member engagement. The growth of card under this partnership should result inlicense fee growth for Hilton.

Expansion Strategies

Apart from expanding its presence in the domestic market, Hilton has fortified its global presence. The company’s scale, size, commercial platform and industry-leading brands continue to drive unit growth.

In 2016, Hilton increased its system size by 6.6%, maintaining its position as the fastest growing global hospitality company on an organic basis.

For 2017, the company projects 6.5% net unit growth. It has more rooms under construction in Europe, the Middle East and Asia Pacific than any other hotel chain.

Notably, the company continues to make great progress with its luxury development strategy, anticipating double-digit growth over the next few years. Hilton’s new brands including Home2 Suites, Tru by Hilton, Tapestry Collection are also gaining momentum globally.

Potential Headwinds to the Top Line

In the United States, RevPAR growth is being impeded by softer group performance and weakness in the oil and gas markets despite strong demand. In fact, the company continues to forecast U.S. RevPAR growth at the low end of its 1-3% system-wide range.

Hilton’s considerable international presence also makes it vulnerable to the economic conditions in various regions. In the Middle East, political unrest and lower government spending continue to hurt tourism. Also, a cooling Chinese economy might hurt discretionary spending as well as travel. In addition, significant currency headwinds may continue to hurt results in the near-term.

Nevertheless, we are reasonably optimistic on this Zacks Rank #2 (Buy) company’s prospects, given its aggressive expansions strategies, asset-light model and industry-leading guest program.

Another stock worth considering in the same industry is Choice Hotels International, Inc. CHH, with the same Zacks Rank as Hilton. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Choice Hotels has witnessed its Zacks Consensus Estimate for current-year’s earnings revising upward by 1.4% over the last two months.

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