Asset Growth Is Key to Hyatt

Asset Growth Is Key to Hyatt

With the tourism and hospitality industries pegged to grow at attractive rates over the coming years, it shouldn't come as too much of a surprise that Hyatt Hotels continues to push its stock price into multiyear highs on the back of international expansion and improving occupancy rates -- particularly in the North American markets. In the company's recently ended quarter, profit grew by an impressive clip as nearly all of sales metrics -- both top-line and unit level -- showed material gains. Hyatt is on track to open a total of 45 new hotels this year (including the company's first in Iraq), and many more in the coming years. For investors, the question is whether valuation is in check for this lodging growth play.

Earnings recap
For the company's third quarter, Hyatt posted a GAAP net income that was more than twice that of the prior year's $0.14 per share. But after accounting for one-time events, the number came in a little lower at $0.23 per share. Wall Street consensus pegged the figure at $0.22 per share.

Revenue bumped up 5% to $1.03 billion, roughly in line with expectations. RevPAR -- revenue per available room -- rose nearly 6% for owned and leased properties. For investors, RevPAR is a crucial figure to monitor as it shows the unit profitability of a hotel's business, similar to same-store sales for retail operations. In North America, Hyatt found its greatest RevPAR growth -- up more than 7% for the quarter.

The company saw its biggest year-over-year growth coming from EMEA and Southwest Asia. In these regions, adjusted EBITDA grew by 120%, while management and franchise fees grew 35.7%. RevPAR grew slightly.

Similar to competitor Marriott International , Hyatt is finding success with its strategies -- expanding the global footprint with a mix of franchised and managed properties while juicing more and more cash out of its more developed North American market. The thing is, it looks like investors are paying a lot more for Hyatt's growth.

Over the long term, Hyatt will do well as a company. The hotelier is different than many of its peers in that it hasn't embraced the "asset light" model. For many, this strategy of franchising and managing hotels has proved to be a great source of free cash flow, but Hyatt continues to build out its owned and leased property portfolio. While it's expensive to build and renovate properties, management finds it a better branding strategy.

Hyatt is facing similar prospects as Marriott, but Marriott trades at a forward P/E less than half that of Hyatt's. A closer look reveals that Hyatt is trading at more than three times sales and has an EV/EBITDA of 13.9 times. For comparison, Marriott has a P/S of 5.47 times and an EV/EBITDA of 14.32 times.

There are a few things to keep in mind when trying to tackle the valuation of a fee-focused hotel chain, too. For one, price-to-sales can be misleading as the top line doesn't grow as fast as earnings and cash flow -- making the stock look pricey. EV/EBITDA is a good metric to use here as it takes into account the companies' debt loads. Hyatt has $1.3 billion in debt and nearly $800 million in cash. Marriott has more than $3 billion in debt and around $140 million in cash.

In turns out that, for the price investors pay, Hyatt is offering a better deal on its cash. Both stocks are relatively expensive here, but for the growth prospects and underleveraged balance sheet, it may be worth the premium.

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