Thesis
Despite a asset-light, fee-based business that's growing, Hilton Worldwide Holdings (NYSE:HLT) isn't convincingly attractive at these valuations.
Overview
Hilton Worldwide Holdings is a global hotel manager, operator of franchises, and owner of a variety of hotel chains and brands. The company's brands are some of the most well-known and ubiquitous in the hotel industry.
The company previously owned hotels, but after the spin-off of Park, a REIT that now runs a vast real estate portfolio, and Hilton Grand Vacations, a timeshare company, the company now focuses the vast majority of its attention on managing and franchising hotels.
As of the end of last year, the company owned, managed, and franchised 5,284 properties with 856,115 rooms across 105 countries. Of these properties, 565 are managed and 4,507 are franchised. When the company manages a hotel, it pays for and deals with the day-to-day operations of a hotel in exchange for a fee that is usually based on a percentage of the hotel's gross revenue. When the company franchises a hotel, it licenses out its operation system to a the franchisee, who then pays Hilton a licensing fee based on a percentage of gross revenue.
This business model is attractive for obvious reasons. By mostly licensing out its operational systems through franchises, the business has dramatically decreased the capital needed for expansion. Whereas, previously, it would have had to buy land and buildings in order to set up a hotel, it now has hotel franchisees that want to open up Hilton hotels come to it and charges them a fee. The required capital expenditures decrease rapidly and the exposure to things like real estate risk also decrease. In many ways, this business model is akin to software companies who license out or sell their software. They invest resources into creating a product that is easily and cheaply producible, and when they go
