Currency Headwinds May Drag Hyatt’s Q2 Earnings Lower
Hyatt Hotels (NYSE:H) will report its Q2 2015 earnings on August 4th. [1] The company should post steady growth in average daily rates (ADR) and occupancy levels across its portfolio. Also, management fees have been trending well for Hyatt in the recent past, and we expect this trajectory to continue. However, the company faced currency headwinds in the previous quarter, which led to a decline in the top line as well as the bottom line. This could well be the case with the June quarter report, as the dollar has remained strong against other currencies. Accordingly, Hyatt’s overseas revenues could have taken a hit. On the brighter side, group bookings were up 7% for 2015 at the end of the previous quarter and are expected to continue this trajectory amid a better macroeconomic environment. [2] This is important for Hyatt as the company derives around half of its revenues from group bookings.
Hyatt’s operations can largely be divided into two categories: owned and leased hotels, and third-party owned hotels. We estimate that owned and leased hotels account for around 40% of Hyatt’s value. The segment revenues are primarily dependent on ADR and occupancy levels at the hotel properties. The segment ADR and occupancy levels have been on an uptrend and stood at $218 and 75%, respectively, in the previous quarter. [3] We estimate ADR will be around $231 and occupancy to be 77% for 2015. Most of this growth will come from a better macroeconomic environment and continued growth in tourism, especially in the U.S. where International visitor arrivals have grown at an average annual rate of 8% in the last five years. [4] This trend is likely to continue in the coming years and the rise in international tourism will aid overall demand for rooms in the region.
Looking at Hyatt’s third-party hotel operations, we expect continued growth in management fees. Hyatt manages and franchises third party owned hotels and charges a fee for this service. Third party owned hotel business accounts for around 60% of Hyatt’s value, according to our estimates. For Hyatt, the management fee is primarily dependent on the revenues and profits of the properties it manages. The estimated Americas third party hotels room revenues grew from $3.26 billion in 2010 to $4.90 billion in 2014. We expect the uptrend to continue driven by growth in the economy, which will boost business travel and convention demand for Hyatt’s hotels. This in turn will boost the ADR and occupancy levels at these properties. On international front, growth seen in emerging nations such as India and Indonesia, and economic recovery in other developed markets such as Japan and some parts of Europe, will drive room revenues and management fees for Hyatt Hotels.
We currently estimate revenues of about $4.60 billion for Hyatt Hotels in 2015, with EPS of $1.25, which is slightly higher than the market consensus of $1.18, compiled by Thomson Reuters. We have a $67 price estimate for Hyatt Hotels, which we will update after the second quarter earnings announcement.
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- Hyatt Hotels’ Press Release [↩]
- Hyatt Hotels’ (H) CEO Mark Hoplamazian on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, Feb 19, 2015 [↩]
- Hyatt Hotels’ SEC Filings [↩]
- International Visitation in the United States, Office of Travel & Tourism Industries [↩]