CAPScall of the Week: Hyatt Hotels


For years, satirical late-night-TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. congressional districts and its representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.

That's why I've made it a weekly tradition to examine one seldom-followed company within the Motley Fool CAPS database, and make a CAPScall of outperform or underperform on that company.

For this week's round of "Better Know a Stock," I'd like to take a closer look at Hyatt Hotels .

What Hyatt Hotels does
It might be somewhat of a head-scratcher to find out that Hyatt has just a parcel of performance calls on CAPS (just 59 in total), but it's true. Hyatt operates hotels, resorts, and vacation properties around the world. Unlike traditional hotel chains, Hyatt is focused primarily on the luxury client, whether it be individuals or enterprise customers.

In Hyatt's most recent quarter, it reported a 64% jump in profits largely due to comparisons to last year's one-time charge-heavy quarter. International per-room revenue grew by less than 1% due to negative currency translation, and the company noted that North American bookings were beginning to slow. Some of this was blamed on the timing of September holidays, according to management.

Whom it competes against
If there's one sector where there's no lack of competition, it's definitely the hotel and lodging sector. Hyatt faces a myriad of foes in the middle- and upper-class resort market, including Starwood Hotels , owner of the Westin chain, Marriott International , Wyndham Worldwide and InterContinental Hotels , the company behind Crowne Plaza hotels and the Holiday Inn chains.

These five companies (Hyatt included) all face challenges that include luring individuals and enterprises to spend money when economic forecasts worldwide are weakening. This doesn't even take into account what damage Superstorm Sandy may have done to the lodging industry within the United States. Also, with these companies operating overseas, strengthening of the dollar has worked against them and reduced their bottom-line profits. This was the case with Marriott, which reported that revenue per available room, or RevPAR, rose by 8% in the U.S. but just 6% internationally. A similar case can be made for Wyndham, whose vacation and rental segment revenue fell 4%, all because of negative currency translation effects.

The call
After carefully reviewing the prospects for Hyatt Hotels, I've decided make a CAPScall of underperform on the company.

Admittedly, I tend to think that much of the lodging sector is incredibly overpriced considering that economic growth worldwide is trending lower and many hotels are taking on large amounts of debt to expand internationally (specifically in Asia). Hyatt, however, might be the worst of the bunch.

Relative to its biggest peers, Hyatt offers the lowest operating margin despite its high-priced rooms primarily due to the high capital investment costs associated with building and maintaining its hotels. These low margins have made Hyatt one of the more expensive companies within the hotel sector. At a frothy valuation of 37 times forward earnings and 14.5 times cash flow, there are few lodging companies that even come close. On top of this, Hyatt, due to its expansion and high maintenance costs, doesn't pay a dividend. Marriott, InterContinental, Wyndham, and Starwood are yielding between 1.4% and 2.3%, respectively. In short, Hyatt is a disappointment all the way around, and there are few apparent catalysts that would send it higher.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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