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Hilton vs. Marriott: Which is A Better Buy Ahead of Q4 Earnings?

Zacks

After experiencing a strong 2017, the hotel industry is likely to enjoy another successful year. A confluence of factors is working in favor of the sector at the moment. Firstly, the economy remains strong and the labor market continues to strengthen. Also, the recent jump in yearly wage growth bears evidence of the fact that the American consumer is likely to have even greater levels of disposable levels of income over the rest of the year.

According to the recently released Deloitte 2018 Travel and Hospitality Industry Outlook, the hotel industry is likely to expand by 5-6% over 2018. This is likely to result in record gross bookings of around $170 billion.

In January, a report by PricewaterhouseCoopers (PwC) indicated that a strong economy and recent tax cuts would fuel the highest rates of occupancy for the hospitality industry since 1981. According to PwC, occupancy is likely to increase to 66.1% for hotels in the United States in 2018.

With Hilton Worldwide Holdings Inc. HLT and Marriott International Inc. MAR both scheduled to report on Feb 14, this may be a good time to consider which of these is a better stock. Both stocks have a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


Other major stocks reporting earnings on Feb 14 include Cisco Systems CSCO and Applied Materials, Inc. AMAT.

Price Performance

When considering price performance over the last three months, Marriott has gained 13.2%, higher than the broader industry’s 9.9% increase over the same period. On the other hand, Hilton has gained 10.8% over this period, which exceeds the broader industry’s performance but falls behind Marriott.

Current Ratio

The hospitality industry requires a large quantum of working capital. Additionally, it also needs to service a number of short-term financial obligations. This is why liquidity ratios are an essential component of the industry’s analysis.

The current ratio measures the ability of a company to meet short-term debt obligations. In other words, it is the ratio of the current level of total assets and expresses to that of the current level of liabilities. Here, Hilton is a clear winner with a current ratio of 0.94, which is superior to the industry average of 0.72 as well as Marriott’s reading of 0.53.

Debt Ratio

The hospitality industry is characterized by a high level of long term debt as well as current liabilities. Such high levels of debt are required to finance, maintain and operate large cruise lines as well. Given the high proportion of long term assets, debt financing over an extended period is a necessary requirement.

Since the sector has a high level of financial leverage, debt ratios naturally come into the picture. This measures the ability of a company to services long term debt. Hospitality stocks should ideally have lower debt ratios. This implies that assets are present in higher proportion compared to debt over the long term.

Here Hilton is at a disadvantage with a debt ratio of 46.5%, which is higher than the industry average of 41.1%. At 35.8%, Marriott has a debt component, which is lower than both Hilton’s as well as the industry.

Dividend Yield

In the last one-year period, Marriott has provided a dividend yield of 0.95%, marginally higher than the industry average of 0.94. In comparison, Hilton offers a dividend of 0.73%. Hence, on a comparable basis, Marriott shareholders earned better dividend yield than those of Hilton.

Valuation

The most appropriate metric to capital-intensive companies like hotels is the EV/EBITDA multiple. This ratio helps to overcome several of the drawbacks of the P/E ratio. This is because, unlike P/E, the EV/EBITDA ratio accounts for both the debt and shareholder perspectives.

With an EV/ EBITDA value of 21.6, Marriott is clearly overvalued compared with the industry which as an EV/EBITDA value of 12.77. In contrast, Hilton is a cheaper stock with an EV/EBITDA value of 11.19.

Gross Margin

Companies which are part of the hospitality industry generate billions of dollars of revenues. Additionally, several companies are well established which implies that appreciably high profit margins are generated by companies with differing market capitalizations.

With a gross margin TTM value of 16.1%, Marriott underperforms its smaller rival Hilton on this count. On the other hand, Hilton sports a gross margin TTM value of 72.6%, which outperforms Marriott as well as the broader industry, which has a gross margin TTM value of 36.8%.

Earnings History, ESP and Estimate Revisions

When considering Earnings ESP, Hilton is a clear winner with an ESP value of +0.13%, which is superior to Marriott’s reading of -1.11%. The situation is similar when comparing the increase in earnings estimates over the last thirty days. While Marriott’s estimate has increased by 2.1%, Hilton is better off on this count since its estimate has increased by 3.9% over the same period.

Considering a more comprehensive earnings history, both Hilton and Marriott have delivered positive surprises in each of the trailing four quarters. However, Hilton has a superior average earnings surprise of 19.2% compared to Marriott’s figure of 9.1%.

Conclusion

Both Hilton and Marriott carry a Zacks Rank #2, so there is little to choose between the two on this count. However, our comparative analysis shows that Marriott has an edge over Hilton when considering price performance, debt ratios and dividend yields.

But when considering valuations, gross margins and current ratios, Hilton is a superior stock. Hilton is also ahead when considering their comprehensive earnings histories and estimate revisions.

What clinches the case firmly in favor of Hilton is a superior ESP value of +0.13% than Marriott’s reading of -1.11%. This is why it may be a good idea to bet on Hilton over Marriott as they prepare to report earnings on Feb 14.

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