Saturday, February 15, 2014

Check In to Hilton With Blackstone for the Long Term

This article was originally published by TheStreet 
NEW YORK (TheStreet) -- The world's largest hotel chain owner, Hilton Worldwide Holdings(HLT_), backed by the private-equity firm Blackstone Group (BX_)recently raised $2.35 billion at its initial public offering, thus becoming the biggest IPO in the lodgings industry, breaking Hyatt Hotel's (H_) record of raising $1.1 billion at its debut in late-2009.
Hilton's shares closed at $21.60 on Friday, which puts a market cap of $21 billion on the business. Its shares are trading just 2.3 times trailing sales and 28 times next year's earnings estimates, which makes the stock extremely attractive considering the much higher industry's average numbers as well as Hilton's powerful brand and growth prospects.
The company's new CEO, who came around six years ago, has done an excellent job in cost cutting and with the growth of the project pipeline. The business has delivered strong growth over the last six years, including significant growth in international markets, in contrast to the industry's sluggish environment.
Although Hilton doesn't have a healthy balance sheet, it is heading in the right direction. The business has the leadership position in both international and domestic markets. Despite the IPO, it appears that the Blackstone Group has made a long-term commitment as it is not going to sell any of its shares, in the words of Blackstone's Chief Executive, Stephen Schwarzman, for "many years." And I believe you should do the same.
New York-based Blackstone acquired Hilton for $26 billion in 2007. Since then, the hotel chain has delivered an impressive performance, despite the overall industry recession.
After the acquisition, Hilton got hold of a new CEO, Christopher Nassetta, whose cost-cutting measures, international expansion and a shift toward a more lucrative franchise model fueled the company's growth.
The performance of Hilton Worldwide is evident in its industry-leading numbers, which are in stark contrast to the general downward trend witnessed by the hotel sector.
A look inside Hilton's Securities and Exchange Commission filing reveals that for the six years ended in June, the company saw a 34% increase in the number of open rooms, which is the highest for any major lodgings company. The number of rooms in its development pipeline rose 52% to 176,000; nearly all of these are in its higher margin segments. The total number of rooms under construction rose 121% to 92,000, also an industry-leading figure.
During this period, Hilton increased its focus on the international markets. The company's rooms outside the U.S., which are under construction, increased by almost 80% from less than 15% in 2007, while rooms in its development pipeline outside of the U.S. increased from less than 20% to more than 60%. In China, Hilton has 171 hotels opened or under development, a big jump from just six hotels in 2007.
During the first six month of the current year, Hilton reported a 2.7% year-over-year increase in revenue to $4.64 billion, while its net income jumped 65.8% to $189 million. The increase was due to higher room rates and better occupancy rates.
On the other hand, Hilton has a lofty debt-to-equity ratio, which is about 10 times as large as the industry's average. The business has total debt of $15.1 billion, which takes its debt-to-equity ratio to 560%, considerably higher than industry's average of just 58%.
Although Hilton's balance sheet isn't perfect, the situation isn't alarming either. The company reduced its debt significantly (by $4 billion) on the back of the debt restructuring in 2010. Moreover, management has demonstrated its cost discipline and its ability to increase cash flows from operations. That caused a $2.4 billion drop in long-term debt between the end of 2010 and mid-2013. Plus, the company will use some of the proceeds from the IPO to deleverage. In short, although Hilton has high leverage but it is heading in the right direction.
The company also increased its focus on the higher margin fee-based 'management and franchise' segment and the capital efficient timeshare segment, as opposed to the ownership segment. The two former segments are far more lucrative and will improve the company's ability to generate cash flow in the coming years.
More importantly, Hilton's future looks very promising. No single hotel company enjoys more than 5% market share (in terms of hotel rooms) in the international market and more than 10% market share in the U.S. market. In international and domestic markets, Hilton is right at the top with a 5% share in the global market, ahead of InterContinental Hotels Group (IHG_), and a 10% share in the U.S. market, ahead of Marriott International (MAR_).
Since Hilton holds the largest market share, it could benefit the most from the recovery in the hotels and lodgings market. The hotel industry, which reported a 6.8% increase in revenue per available room last year, expects a 5.7% improvement this year and 6% in 2014. The growth in the demand for rooms continues to outpace the supply and this trend will likely continue through at least 2015. That would translate into further improvement in Hilton's earnings.
At the time of publication the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.