Strong Growth In Management & Franchise Fees Drives Earnings Beat For Hyatt

Hyatt Hotels (NYSE: H) has managed to beat earnings expectations often of late, and the most recent quarter was no different. This quarter marks the ninth consecutive time that the company has surpassed consensus EPS estimates. The company’s revenues, however, missed expectations. This is unsurprising though, as the company is in the midst of its asset recycling program. While the company experienced a 9.6% growth in management and franchise fees, revenues from the Owned and Leased hotels business declined by 16% for the quarter due to the aforementioned asset recycling program. Overall, revenues for the quarter declined by 1.4%. That said, RevPAR and occupancy rates improved across all full service, select service, and owned & leased hotels. This, along with margin expansions in management and franchise business, drove the growth in EPS.

The company’s stock price dipped slightly following the earnings announcement but has recovered since. We are positive about the company’s future outlook and maintain a $84 price estimate for Hyatt, which is ahead of the current market price. Our interactive dashboard for Hyatt’s earnings details our forecasts and estimates for the company. Below we discuss our expectations for the upcoming quarter.

Management And Franchising Business Set To Do Well

Two critical metrics for a hotel are RevPAR (revenue per available room) and occupancy rates, and Hyatt saw improvements in both. Moreover, the company delivered another quarter of net rooms growth. Given these factors, the company is optimistic about the strength of its development pipeline, which stands at 73,000 rooms. Furthermore, the company is using the sales proceeds from the asset recycling program to expand its select service hotels. In the last five years alone, Hyatt has expanded its global select service portfolio by about 71% and it plans to double its portfolio in the next five years. This seems to be a step in the right direction, as this line of business is more profitable. China has been a strong market for Hyatt, as it has 58 hotels in the country and plans to more than double that number in the next four years. Additionally, the company has been executing favorable renewal deals. With travel and tourism flourishing in the country, this focused expansion approach will likely yield favorable results. Meanwhile, in the U.S. market, resort hotels should continue to deliver solid results.

Owned And Leased Hotel Business To Continue On Its Downward Trend

As mentioned above, Hyatt is disposing of hotels from its Owned and Leased Hotels segment and investing a larger portion of the proceeds in select service hotels. Moreover, the disposal of the company’s assets has outpaced the number of acquired assets, which will likely continue for the rest of the year. Consequently, this line of business will likely end up as a net seller in 2018 and generate lower revenues as a result. That said, solid results from food and beverage business and the company’s attention towards improving operations should result in higher margins from this segment.

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