Pros and cons of buying Hilton

The outlook for this hotel chain looks good, but there are some serious concerns to be weighed as well.

By InvestorPlace May 12, 2014 4:15PM

Hilton Hotel, Midtown in New York
© Andrew Kelly/ReutersBy Tom Taulli


Back in December, Hilton Worldwide Holdings (HLT) raised $2.35 billion from an IPO, which was the biggest deal ever for the hotel industry.


The performance has been sluggish since then, but after its first-quarter report, Hilton stock is up about 2.5 percent.


Revenues increased by 4 percent to $2.36 billion, and adjusted earnings came to 13 cents per share. The Street consensus was for revenues of $2.34 billion and profits of 9 cents per share.


Hilton stock also got help from the guidance. Full-year earnings are expected to be 64 cents to 67 cents per share, which is up from the prior forecast of 57 cents to 61 cents.


So in light of all this, does it make sense to buy Hilton stock? Well, let’s take a look at the pros and cons:

Pros

Massive footprint: HLT is one of the world's largest hotel operators, with more than 4,100 locations across 91 countries and territories. Besides the Hilton brand, there are others like Waldorf Astoria Hotels & Resorts, Conrad Hotels & Resorts, Embassy Suites Hotels and plenty of others. Another important part of HLT is its loyalty program, called Hilton Honors. It has a whopping 40 million members and has been an effective way to generate more repeat business. There is even a timeshare operation, Hilton Grand Vacations, which counts more than 314,000 members.


Business model: A key driver for Hilton stock is its monetization strategy, where a big focus is on franchising. This means that Hilton doesn't have to put up large amounts of capital when building out a location. Franchising also means it is much easier to grow the global operations. As for the pipeline, there are 194,572 rooms scheduled for development and nearly all of them will be part of franchise arrangements.


Industry fundamentals: Since the financial crisis of 2008, there has been meager capacity in the industry. At the same time, it looks like the U.S. economy is poised for stronger growth. According to a report in The Wall Street Journal, a survey of economists is predicting 3.3 percent annual growth in GDP, up from 3 percent in April. With such positive factors, demand will likely pick up in demand for travel and hospitality, which should help boost Hilton Stock. Actually, there are already signs of this. HLT predicts that revenue per available room, a key metric in the industry, will grow 5.5 percent to 7 percent this year.


Cons

Overhang: Back in 2007, Blackstone (BX) took HLT private in a $26 billion transaction. The timing was certainly bad, and there had to be painful restructuring. The situation is much better now, but BX still has 76 percent of Hilton Stock. Over time, the private equity firm will sell shares, but that could mean that there will be ongoing pressure on the price.


Valuation: Hilton stock is far from cheap, with a forward price-to-earnings ratio of 29. This is actually higher than some high-growth tech operators, like Priceline (PCLN), which has a multiple of 17. And yes, Hilton stock is much more expensive than its rivals:


HotelStocks


Disruption: With the surge in the Internet and mobile technologies, Hilton stock could come under pressure. Competitors like Airbnb could ultimately take business away from the company. Essentially, Airbnb allows people to rent out their own homes and apartments on a short-term basis. Currently, there are over 600,000 listings, and the company also recently raised $500 million at a $10 billion valuation. Keep in mind that the market cap of Hilton stock is $22 billion.


Verdict

Since the BX buyout in 2007, HLT has proven to be adept at managing through tough times. Then again, the company has been around for 100 years and has built a tremendous platform. Going forward, HLT should also benefit from the positive industry fundamentals, in terms of constrained capacity and growth in travel expenditures.


Despite this, the fact remains that Hilton stock is far from cheap (there is also no dividend yield). In other words, for investors looking to play the hotel space, there are many other top-notch brands to choose -- like MAR, HOT or WYN.


So should you buy HLT stock? No -- for now, it’s probably best to look elsewhere.


More from InvestorPlace

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. As of this writing, he did not hold a position in any of the aforementioned securities.

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