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Wyndham Hotels: A Capital-Light Franchisor Trading At A 10% Normalized Free Cash Flow Yield

Jun. 03, 2020 2:13 AM ETWyndham Hotels & Resorts, Inc. (WH)4 Comments
Matt Franz profile picture
Matt Franz


  • Wyndham's management has cut $100M of permanent costs in response to the global pandemic.
  • One-off costs related to Wyndham's spinoff, La Quinta acquisition, and two hotel management contracts have obscured Wyndham's normalized earnings power.
  • Normalizing earnings and crediting $100M of costs savings suggest Wyndham trades for just 10x normalized free cash flow.
  • Wyndham is a capital-light business with a large addressable market for growth and should be worth 17-21x. This provides a wide margin of safety.
  • A fortress balance sheet means Wyndham can cover 36 months of fixed charges in a zero-revenue environment. This gives Wyndham runway to wait for a recovery.

Winston Churchill famously said, “Never let a good crisis go to waste.” Rather than say it, Wyndham Hotels' (NYSE:WH) management is doing it. While others viewed April’s precipitous drop in RevPAR as a disaster, management viewed it as an opportunity to reset the company’s cost structure. On the May 5th call it explained that it had already slashed 2020’s cash outlays by $255 million and permanently reduced costs by $100 million. The permanent savings are from a reduction in facilities, vendor spend, and 440 positions.

This is a remarkable feat for a company that was lean to begin with. In 2019, Wyndham generated $600 million of adjusted EBITDA on revenues of $2,050 million. But this 30% margin understates Wyndham’s economics. Over half of Wyndham’s revenues are marketing and reservation fees which Wyndham is contractually obligated to spend in support of franchisees. These revenues have no impact on EBITDA or free cash flow. Stripping them out, Wyndham sports a 70% margin.

CFO Michele Allen affirmed that, ceteris paribus, last year’s $600 million of EBITDA would have been $700 million and margins would be 500 basis points higher. Straight from the horse's mouth:

Analyst: So just to clarify, I mean, are you saying that with these savings last year's $613 million EBITDA would have been $713 million. I mean, how do I think about that?

Michele Allen: Yes. That's the right way to think about it.

Normalizing 2019’s earnings and adding the costs savings suggest Wyndham can produce $420 million of free cash flow in a normal environment (i.e., not 2020).

Source: Author, Data from 2019 10-K

Today Wyndham’s stock is worth $4,300M ($46 per share x 93M shares), just about ten times normalized pro forma free cash flow. This seems too cheap considering that Wyndham Hotels is a quintessential capital-light compounder

This article was written by

Matt Franz profile picture
Matt Franz is a Principal at Eagle Point Capital LLC. Eagle Point Capital's objective is to avoid the permanent loss of capital while maximizing the increase in long-term, after-tax purchasing power of funds. Put another way, Eagle Point Capital aims to build an indestructible long-term compounding machine.Matt Franz also writes on Eagle Point Capital's website, www.eaglepointcap.com.

Analyst’s Disclosure: I am/we are long HLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (4)

22 Jun. 2020
Amazing article. Thank you.
Visual Capital profile picture
@Matt Franz Great writeup!

I noticed you're long HLT but not WH. Curious about your thoughts on HLT from a valuation point of view?
Matt Franz profile picture
HLT is more expensive than WH but also possesses higher long-term growth prospects (in my opinion), due to industry-leading RevPAR index premiums and organic growth pipeline, so a higher valuation is warranted. WH is better positioned in the near-term with a focus on drive-to leisure while HLT will take longer to recover because of its business and fly-to exposure. HLT seems like a better long-term opportunity and has a time arbitrage element to it, while WH is more about cost cuts that the market doesn't seem to fully appreciate yet.

My colleague @Dan Shuart wrote about HLT recently if you want more details: www.eaglepointcap.com/...
Fantastic presentation. Well done!
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