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Hilton Rides on Strong Business Model Amid Stiff Competition

Zacks

Hilton Worldwide Holdings Inc.’s HLT differentiated brand portfolio, strong expansion plans, a capital-light business model and robust loyalty programs are encouraging. However, its substantial international presence makes the company vulnerable to macroeconomic conditions and negative currency translation.

The company recently reported better-than-expected results in the fourth quarter of 2017. Adjusted earnings per share of 54 cents outpaced the Zacks Consensus Estimate by 10 cents but decreased 22.9% year over year. Nonetheless, the bottom line came well ahead of the guided range of 41-45 cents.

Moreover, Hilton has a good track record of earnings surprise in the recent past wherein reported earnings have beat consensus estimates in each of the trailing four quarters, with an average beat of 18.61%.

Also, shares of Hilton have rallied 41.8% in the past year, slightly outperforming the industry’s gain of 41%. Given its aggressive growth initiatives, the stock is expected to keep performing well, going forward.



Expansion Strategies Drive Market Share

Hilton is known for its scale, size, commercial platform and industry-leading brands. In a bid to maintain its position as the fastest-growing global hospitality company, Hilton is continuing to drive unit growth.

In 2017, Hilton witnessed net unit growth of 18,400 rooms. Further, the company expanded its footprint across new countries to a total of 105 countries and territories. For 2018, the company projects an approximate 6.5% net unit growth. It also continues to have more rooms under construction in Europe, the Middle East and Asia Pacific than any other hotel chain.

Relentless expansion helps the company gain greater market share globally and its geographic diversity lowers the effect of volatility in individual markets.

Customer-Centric Loyalty Program

Hilton’s premier brands provide distinguished customer-centric services to strengthen the brand image and drive customer loyalty. The company has created one of the largest loyalty programs, Hilton Honors. With about 71 million members, this network has created an extremely valuable asset for the company. In 2017, the company added over 11 million members to the program.

In the meantime, innovations such as the Hilton Honors app continue to drive growth in the program. In addition to being the company’s fastest growing and lowest cost distribution channel, this app, launched in December 2017, also enables a differentiated customer experience.

Additionally, starting in November 2017, Hilton’s partner American Express (Amex) has launched and will be marketing a portfolio of Hilton Honors credit cards in the country, which will help the program’s membership to grow.

Hilton, thus, continues to make multiple enhancements to its loyalty program in order to make it the most customer-centric program, driving incremental value for guests and the overall system.

Capital-Light Business Model to Reward Shareholders

Hilton has transformed into a capital-light operating business, backed by the spin-off of a portfolio of hotels and resorts as well as its timeshare business. The focus is primarily on growing market share, units, free cash flow per share as well as preserving the company’s strong balance sheet and accelerating return of capital. Furthermore, 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 should allow shareholders to receive high returns on invested capital. In fact, in the fourth quarter, the company repurchased 3.5 million shares of its common stock for roughly $266 million and an average price per share of $74.67. The company aims to strengthen shareholders’ value through regular dividend payment and buybacks, going forward. This reinstates our faith in the company’s strong fundamentals and cash-flow position.

Competition Remains a Challenge

The hotel industry is highly competitive, as major hospitality chains with well-established and recognized brands are continuously expanding their global presence. Hilton is continuously facing intense competition from both large hotel chains like Marriott MAR and Hyatt H, as well as smaller independent local hospitality providers.

Increasingly, the company also faces competition from new channels of distribution in the travel industry. Additional sources of competition include large companies that offer online travel services as part of their business model such as Alibaba BABA, search engines such as Google and peer-to-peer inventory like Airbnb and HomeAway that allow travelers to book stays on websites, facilitating short-term rental homes and apartments from owners.

Unless Hilton counters these competitions with appropriate strategies, it may pose a concern to the company’s future profitability.

Zacks Rank

Hilton carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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