Some investors may have reservations about the chances for booking further gains from Hilton Hotels Corp. (HLT-OLD), which saw its share price shoot up 3 percent in morning trade after it unveiled Street-beating quarterly earnings. The stock price is also up about 21 percent over the last three months. But historical revenue and growth data for one of the most recognized names in the hotel business suggests the shares still have more room to climb.
A quick glance at Hilton's price to earnings (P/E) ratio indicates that the stock is priced at a lofty valuation relative to the industry norm, which should not be surprising given its performance in the prior three months. The stock easily outpaced the industry average of 8 percent and the roughly 7 percent gain in the S&P 500 index. As indicated below, though, other metrics price Hilton at a discount to the industry norm.
Keep in mind that the above valuations are based on Hilton's performance before the most recent earnings announcement. For instance, its P/E and P/Sales ratios are based on earnings per share [EPS] and revenue in the trailing 12 months [TTM] prior to the most-recent earnings release.
Looking at the company's historical performance, we see that it has done a good job of improving its top-line and EPS growth rates in the TTM span from their five-year averages. And we find that the most recent quarter's 100 percent increase in revenue and a 32 percent gain in EPS marked continued acceleration in the paces of improvement.
Of course, it is important to remember that very fast growth rates are unsustainable over long periods of time. And this is reflected in analyst estimates. In a recent Reuters poll, 13 analysts, on average, said the Hilton can grow its EPS at an average annual long-term pace in excess of 15 percent. Of course, that 15 percent is an average of estimates that range from 9 percent to more than 30 percent.
Our back-of-the-envelope calculations, which are based on the company's historical revenue and earnings growth, as well as analyst estimates, indicate that Hilton can expand its earnings at a clip of just over 12 percent. Yet, our analysis also suggests the company needs much slower EPS growth -- an average annual pace of only 9 percent -- to justify the current stock price.
At the time of publication, Erik Dellith did not own shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.
Note: This is independent investment and analysis from the Reuters.com investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by Reuters.com.