My rating for Hyatt Hotels Corporation (NYSE:H) stays as a Hold. The good thing is that H’s recent acquisition represents an allocation of capital to Europe, a market with good long-term growth potential. The bad thing is that Hyatt’s 2024 prospects appear to be unexciting.
I previously analyzed Hyatt’s first quarter results and its asset monetization initiatives with my prior May 11, 2024, update. The current article touches on H’s latest M&A deal and its short-term growth outlook. In the near term, H’s 2024 top line and RevPAR (Revenue Per Available Room) are likely to grow modestly, considering a high base in 2023 which benefited from post-COVID travel recovery. For the mid-to-long term, Europe is a key growth market, and H has planted the seeds for future growth with its purchase of the me and all hotel brand. I continue to award a Hold rating to H, following an assessment of its 2024 outlook, and its growth potential in Europe for the long run.
Recent Acquisition Has Positive Read-Throughs For H’s Long-Term Growth Prospects
A company is in a better position to realize its growth potential for the long run, if it can capitalize on opportunities to expand in under-penetrated markets and segments with good prospects. This is exactly what H is doing, as evidenced by its most recent inorganic growth transaction.
In my previous May 2024 write-up, I noted that “Hyatt continues to monetize its assets and generate divestiture proceeds that can finance future growth investments.” Late last month, H concluded the purchase of the “fast-growing upscale brand me and all” to “unlock growth in new European markets and build on Hyatt’s strong momentum in” Europe as per its June 28, 2024, announcement. In this latest disclosure, me and all is described as “a boutique lifestyle brand” targeting “city and business travelers as well as urban locals.”
There are various signs indicating that H has room to expand further in the European hospitality market.
Hyatt’s EAME (Europe, Africa, the Middle East, and Central Asia) management & franchising business segment contributed a modest 6% of the company’s EBITDA for the most recent fiscal year or FY 2023. H acknowledged at the 2024 Morgan Stanley (MS) 2nd Annual Travel & Leisure Conference on June 4 that it has “lower penetration” in “Europe.” At the 2024 Baird Global Consumer, Technology & Services Conference on June 5, Hyatt drew attention to the “very low supply” in the “upper upscale, luxury segments” of “Western European markets” which is in contrast with the “highly competitive” US hospitality market.
There are 6 me and all hotels with a combined total of 1,000-plus rooms in Germany as of June 28, 2024. The number of hotel rooms for the me and all brand could potentially double going forward, taking into account the current me and all hotel pipeline of approximately 1,000 rooms. These numbers are taken from Hyatt’s June 28 announcement.
The current hotel pipeline for the me and all brand is largely focused on the German market. Therefore, the me and all brand portfolio might even grow more significantly in the future with new hotel openings in other parts of Europe.
In a nutshell, I am encouraged by Hyatt’s most recent move to allocate capital to inorganic growth investments in the under-penetrated European market. This bodes well for H’s long-term growth prospects.
Anticipating Slower Growth For Hyatt In The Near Term
The company’s short term financial performance might be subdued, and this could possibly weigh on Hyatt’s stock price in the near term.
H is expected to reveal the company’s financial performance for Q2 2024 on August 6. Hyatt had previously guided that its RevPAR (Revenue Per Available Room) will moderate from +17% last year to +4% (mid-point of guidance) this year.
Separately, H’s top-line growth is projected to slow from +2.0% YoY for Q1 2024 to +1.7% YoY in Q2 2024 as per the sell-side’s consensus projections taken from S&P Capital IQ. This is consistent with Hyatt’s first quarter earnings briefing remarks highlighting that “we expect year-over-year growth rates to moderate” in Q2. As a reference, the consensus full-year FY 2024 top-line growth estimate for H is a similarly modest +2.1%.
More importantly, third-party industry research also suggests that H might find it tough to grow meaningfully in Q2 2024 and full-year 2024.
Real estate research firm CBRE (CBRE) forecasts that the U.S. hospitality sector will record an unexciting +3% increase in RevPAR for 2024 due to negative factors like “an economic slowdown”, and “military conflicts in Europe and the Middle East.” In other words, external challenges like wars and weaker growth will most probably be a drag on the broader hospitality market.
Skift, a research outfit focused on travel, predicts that worldwide “travel industry revenue growth will decelerate from (2023’s) eye-watering double digits” this year because of “normalization” and an end to “capacity constraints.” Skift’s research suggests there is an absence of post-pandemic revenge travel tailwinds in 2024 unlike 2023, and indicates supply in the hotel market would have caught up with demand.
In terms of actual Q2 2024 data, the U.S. hotel sector’s RevPAR increased by +1.9% YoY and +4.0% YoY for April and May, respectively, as per Smith Travel Research data.
As per independent market research, sell-side consensus forecasts and management commentary outlined above, it is realistic to assume a low-single digit percentage increase in both RevPAR and top line in 2024 for H.
Bottom Line
Hyatt’s growth-adjusted price-to-revenue multiple is 1.1 times (2.3/2.1) based on its consensus next twelve months’ price-to-sales ratio of 2.3 times (source: S&P Capital IQ) and its consensus FY 2024 top-line projection of 2.1%.
The growth-adjusted price-to-revenue metric is similar to the PEG or Price-to-Earnings Growth multiple. A PEG of 1 is deemed to be indicative of fair valuation, with the stock’s earnings multiple being roughly equal to its earnings growth rate. Similarly, H’s growth-adjusted price-to-revenue metric is close to 1 times, as its revenue multiple is on par with its expected top-line expansion rate. As such, it will be reasonable to view H’s shares as fairly valued based on the growth-adjusted price-to-revenue ratio.
With respect to the company’s prospects, Hyatt has the potential to grow its presence in the European market in time to come, but 2024 is less likely to be an exciting year of growth for H. This provides support for my Hold rating.
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