Will Economic Headwinds Hurt Hyatt’s Solid Run?
Hyatt Hotels (NYSE:H) is seeing a strong recovery in its business, as leisure travel picks up with a vengeance following close to two years of Covid-19 pandemic restrictions. In an update last week, the company indicated that over the 2022 Memorial Day weekend, it saw the highest levels of revenue per available room in any individual month since November 2019, with revenue per available room in America coming in at about 24% above Memorial Day weekend 2019. Bookings are also looking strong. The hotel chain says that comparable systemwide transient revenue for June to August trended about 5% higher than the same period in 2019. The number would be 15% higher excluding the Asia Pacific region, which has been hurt by stringent Covid-19 restrictions in China. The company’s recent acquisition of Apple Leisure Group is also helping it to raise its capacity, with total rooms standing at about 286,000, about 19% ahead of last year giving the company the ability to service demand.
That said, investors now appear to be a bit concerned about whether the momentum will hold up. The U.S. economy could be headed into a recession, as the Federal Reserve hikes interest rates at a more aggressive pace to tame surging inflation. The central bank raised the benchmark federal-funds rate by 0.75% during its Wednesday meeting and indicated a more aggressive path for future rate hikes. Consumer confidence is also declining, as surging energy, grocery, and housing prices eat into household budgets. Hyatt stock is already pricing in some of the economic pain, correcting by about 15% year-to-date.
The company will be going into a potential downturn with a considerable amount of debt, with net debt standing at $2,516 million in Q1 2022, up around 15% versus last year partly due to the acquisition of Apple Leisure Group. Net Debt is about 10x the company’s adjusted EBITDA for 2019, which is somewhat high. While the company is looking to divest its lower-performing properties to pay down debt, it remains to be seen how well this will progress, if the economy continues to deteriorate. That said, economic indicators do not point to a very deep recession this time around, with household savings rising post the pandemic and banks also remaining well-capitalized. This could soften the blow for the broader hospitality sector.
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We remain neutral on Hyatt stock at current levels with a $90 per share valuation, which is slightly ahead of the current market price. See our analysis on Hyatt Valuation: Is H Stock Expensive Or Cheap? for more details on Hyatt’s valuation and how it compares with peers. For more information on Hyatt’s business model and revenue trends, check out our dashboard on Hyatt Revenue: How H Makes Money.
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