Which Hotel Stock Should You Bet On: Hyatt Or Hilton?

by Trefis Team
Hyatt Hotels
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Hyatt stock (NYSE: H) has declined by close to 40% since early February after the WHO declared the coronavirus disease a global health emergency, while Hilton stock (NYSE: HLT) has fared slightly better and lost 30% of its value. Lockdown measures and social distancing norms have significantly affected the travel & tourism industry across the world. More so, the hotel occupancy rates have fallen off the cliff triggering fears of a prolonged downturn for the sector. Base management or franchise fees, which are charged as a percentage of third-party hotel revenues, contribute a major chunk of both hotel operator’s earnings. In fact, the M&F room portfolio accounts for nearly 80% of Hyatt and Hilton’s total room inventory. While the expansion of M&F room portfolio has been the key focus for both hotel operators in recent years, Trefis believes that Hilton will continue to outperform Hyatt supported by its higher EBITDA margin, larger total room portfolio, and stronger top-line growth. Despite Hilton’s total room portfolio being 4x of Hyatt, it has grown by 15% since 2017 as compared to 22% for Hyatt – warranting a higher valuation multiple (EV/EBITDA).

Our conclusion is based on our detailed dashboard analysis, ‘Is Hyatt Hotels Expensive Or Cheap vs. Hilton Worldwide Holdings? wherein we compare trends in key metrics for the two hotel companies over the years to determine their relative valuations under the current circumstances. We summarize parts of this analysis below.

Why Has Hilton Outperformed Hyatt Over Recent Months?

Hilton’s EV/EBITDA based on 2019 earnings has declined from over 17.3x in 2019 to 13x currently, while Hyatt’s multiple has declined from 14.6x to about 9.5x. The steeper decline in Hyatt’s multiple can be attributed to the slow growth of its M&F segment revenues and a declining EBITDA margin.

Also, Hilton’s multiple still appears high, considering that the company’s revenues and margins also face the same systemic risk of a prolonged slump in travel demand compared to Hyatt. Notably, Hyatt’s EV/EBITDA is at the lowest level in the past three years while Hilton’s EV/EBITDA is around the same level seen at the end of 2018. However, Hilton’s stock will continue to outperform Hyatt supported by stronger fundamentals.

But How Long Will The Hotel Industry Remain Under Pressure?

The expected timeline for recovery in global economic conditions, and in travel demand, hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of Hyatt’s multinational peers, including Hilton’s stock and Red Lion Hotels’ stock. The complete set of coronavirus impact and timing analyses is available here.

Although most companies will report poor Q2 results starting mid-July, market expectations will be buoyed by a visible improvement in the situation on the ground. That said, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

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