What Factors Can Drive Hyatt’s Stock Value?
Hyatt Hotels (NYSE:H) owned and leased hotel operations have been trending well for the past few years. Key to this performance has been the improving macro-economic environment in the U.S. Hyatt’s hotel occupancy has remained at over 75% while the average daily rates (ADRs) have grown at an average annual rate of 8% since 2010. [1] This economic sensitivity, in our view, is the key driver of Hyatt stock performance. In light of anticipated growth in the country’s economic parameters and tourism, we believe that a higher-than-expected increase in U.S. personal disposable income and international visitors could spur growth in demand for rooms and catalyze Hyatt’s stock price movement. Similarly, higher-than-expected growth in Hyatt’s loyalty program membership base can lead to a potential upside of over 10% to the company’s stock price. Let us take a closer look.
See our complete analysis for Hyatt Hotels
U.S. Personal Disposable Income Grows By 3% And The Number of International Visitors Grows By 7% (+10% Upside To Stock Price)
We estimate that owned and leased hotel operations account for over 30% of Hyatt’s value. The company offers more than 20,500 owned or leased rooms across the globe. However, around 80% of these rooms are located in the U.S. Hotel operations are usually linked with the macro-economic environment and tourism in the region. However, to better understand causal relationship, we ran a regression analysis on the data from 2007 to 2014 with hotel RevPAR (revenue per available room) as the dependent variable and the U.S. personal disposable income growth and international visitors growth as independent variables. We arrived at R-square of 0.82 for these variables, which, being on the higher side, indicates a relatively high level of correlation. To strengthen our argument, we also computed the F-significance, which defines the significance of independent variables to the response variable. In this case, the F-significance is 0.03, which also indicates a very strong relationship between these variables. Hence, we know that, historically, both U.S. personal disposable income growth and international visitors growth are both highly correlated with hotel RevPAR growth.
Based on the above analysis, we estimate that Hyatt could garner around $3.65 billion in owned hotel revenues if U.S. personal disposable income grows at an average annual rate of around 3% and international visitors growth is over 7% in the coming years.
However, we take a conservative view in our pricing model, owing to stiff competition in the lodging industry and uncertainties regarding the macro-economic environment such as the impact of Greece default on the developed economies and the high unemployment rate in the U.S. We assume around 2% average growth for personal disposable income and around 5% growth in international visitors out to 2019. Nevertheless, any improvement in the macro-economic environment and lower unemployment could provide ample growth opportunities for hotels, driving increases in both tourism and business travel. If Hyatt’s owned hotels RevPAR were to grow to $300 by 2019, it would translate into incremental revenues of around $500 million. This would add more than 10% to the company’s stock value.
Hyatt’s Loyalty Program Member Base Reaches 30 Million (+10% Upside To Stock Price)
Hyatt expanded its loyalty program’s membership base from 9 million in 2009 to 18 million in 2014. [1] The company has been expanding its properties across the globe and more people are joining the rewards program. The basic tier of the membership offers 5 points on every eligible dollar spent across Hyatt’s portfolio of properties across the globe. The members can exchange the accumulated points for a reward night. Usually, a hotel loyalty program offers various benefits such as early check-in, late check-out and room upgrades, depending on the tier of program. Hyatt currently offers three tiers, Gold, Platinum and Diamond and the criteria for each tier upgrade depends on the number of nights booked during a specified period.
The loyalty program is important for Hyatt as it accounts for around 36% of room nights currently. If a customer likes one hotel operator, he or she tends to stick with it, especially in case of corporate travel as it provides an opportunity to earn more reward nights faster. Also, corporates usually ink yearly contracts with the hotels and they are offered lower rates depending on the number of room nights blocked. In such cases, it makes sense for frequent travelers to enroll into the loyalty program with the hotel operator. With continued expansion across the globe and attractive benefits of loyalty program to lure frequent travelers, Hyatt will continue to expand its membership base and also see continued growth in the percentage of member room nights which, in turn, will boost the occupancy levels as well as guest spending across its portfolio. We estimate that, if the membership base reaches 30 million mark in the coming years, Hyatt could garner as much as $7.50 billion in annual revenues.
We still take a conservative view in our pricing model, owing to the expected increase in competition in lodging industry as well as in the loyalty programs of various brands such as Hilton, Carlson and Marriott. Accordingly, we assume annual revenues of around $7 billion by 2021, driven as well by continued expansion. Nevertheless, Hyatt’s solid set of brands, which cater to various customer segments, could add more members to its loyalty program and translate into incremental revenues of close to $500 million over the next few years, adding 10% to our price estimate and EPS for 2021. This impact will come from improved occupancy levels, which will boost the room revenues across its properties.
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