How Is Hyatt Likely To Grow In The Next Two Years?

The last few quarters have been good for Hyatt Hotels (NYSE: H) as its adjusted earnings per share has often beat market expectations. Furthermore, Hyatt’s stock price has gained close to 36% since the start of 2017, and we expect the company to gain further momentum given its transition to the franchise-based operating model and the growth outlook in the Asia Pacific region. We expect Hyatt’s top line to grow at a CAGR of 1.42% over the next two years. You can see more on our interactive dashboard for Hyatt’s growth prospects. You can adjust any of the company’s key drivers to see the impact of changes in the overall revenues, earnings, and valuation. 

In our previous note, we expanded on Hyatt’s key sources of revenue and provided high-level expectations for the next two years. This supplementary note provides our detailed forecasts for the hotel’s major business segments – Owned and Leased hotels, and Management and Franchising.

China Set To Drive Growth In Management And Franchising Business

Two critical metrics for a hotel are RevPAR (revenue per available room) and occupancy rates, and Hyatt has seen continuous improvements in both. Moreover, the company has delivered ten consecutive quarter of net rooms growth in excess of 6%. Given these factors, the company is optimistic about the strength of its development pipeline, which stands at 73,000 rooms in the most recent quarter. Furthermore, the company plans to use the sales proceeds from the asset recycling program to double its select service portfolio in the next five years. This seems to be a step in the right direction, as this line of business is generally more profitable, generates stable revenue, and requires relatively lower capital. Between 2009 and 2017, the company’s total management and franchise fee has grown at a CAGR of 10.8% and we expect this to grow at a faster rate going forward.

While the above mentioned factors will help in the long run, the expansion focus on China will likely be the catalyst that the company needs to reach the next level. 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. Per the company’s latest investor presentation, fees from Greater China will likely more than double on the back of these increased hotel units. Additionally, the company has been executing favorable renewal deals. With travel and tourism flourishing in the country, this focused expansion approach will likely yield promising results. Meanwhile, in the U.S. market, resort hotels should continue to deliver reliable results.

Owned And Leased Hotel Business To Deliver Flat Results

The company has disposed of more than $1 billion worth of real estate this year, and it plans to further sell $1.5 billion of real estate by 2020. This will likely exert further pressure on the Owned & Leased Hotels business in the near term. 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, the company will probably end up as a net seller in 2018 and generate lower revenues as a result. That said, the luxury hotel segment is set to grow in the next few years on the back of a stable U.S. economy that should drive consumer spending. Moreover, solid results from the food and beverage business and the company’s attention towards improving operations should result in higher margins from this segment.

We maintain our $85 price estimate for Hyatt, which is ahead of the current market price.

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