Park Hotels & Resorts – Time To Check In?

Few companies will bear the brunt of the Covid-19 pandemic like Park Hotels & Resorts (NYSE:PK). With nearly half the portfolio closing at the peak of pandemic, full year revenue is likely to suffer massively. In the Jan-Mar quarter, the company’s revenue declined 9% while net income fell 55% (excluding impact of impairment charge). And that was the period when the pandemic was just starting to set its foothold in the US, which has now become the epicenter. For the full year, the revenue could decline anywhere between 30%-50%, which is an unprecedented situation. This is reflected in a large 64% decline in its stock this year, as of Aug 4, 2020. What does it means for its cash flows and debt situation? Our interactive dashboard Park Hotels & Resorts: A Covid Recession can still generate $19 Mil in cash during 2020 suggests that through careful management of its costs and cutting capex, Park Hotels & Resorts could survive this year from a  cash flow perspective. It has also taken additional debt to improve its liquidity position and has  been adjusting debt covenants. This might sound alarming, but could also create upside for the brave. Make no mistake, the company operates in the luxury segment which is likely to take time to pick up. But that’s exactly why the stock is available at a very cheap price right now. Add to that Park Hotels & Resorts’ potential to manage its cash flow, and there might be a hidden investment opportunity here.  

Demand Recovery

In 2019, Park Hotels & Resorts earned $306 million in net income on a revenue base of $2.8 billion. In addition, it generated $499 million in free cash flow from operations, out of which it spent nearly $240 million in capital expenditures. However, the 2nd quarter of 2020 was very different from what any business has faced before. Unfortunately, the impact will linger in the 3rd quarter for the hospitality industry. We consider two scenarios for Park Hotels & Resorts (1) Revenue down for full year 30% but the company cuts its capital expenditure in half (2) Revenue down for full year 50% with 70% capital expenditure cut. The second case may be more likely.

Cash Flow Under Two Scenarios

In the first scenario, where revenue declines by 30% for the full year, Park Hotels & Resorts’ net income could reduce to merely $2.4 million vs $306 million in 2019. However, it may still manage to generate nearly $75 million in cash provided it cuts its capex by half. In the second scenario, where revenue declines by 50%, the company could post losses of $-207 million and it may end up consuming nearly $86 million in cash even after cutting capex by 70%.

But the silver lining is Park Hotels & Resorts’ cash pile. The company added nearly $1 billion to its cash reserves in the first 3 months of 2020, taking the total to about $1.3 billion.

Overall, while in a risky situation, we think that Park Hotels & Resorts could ride out this Covid-induced recession. Investors can look at it if they are willing to be patient, as even in 2021, we may be looking at only 80%-85% demand recovery (compared to pre-Covid levels).

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