Wyndham Hotels & Resorts Should Outperform Its Peers In H2 2020
Summary
- Wyndham Hotels & Resorts’ Q1 2020 was impacted by the pandemic.
- The company’s focus on domestic leisure travellers should be advantageous as domestic travel should recover first.
- Wyndham has ample liquidity to go through this challenging time.
Investment Thesis
Wyndham Hotels & Resorts (NYSE:WH) had a challenging Q1 2020 due to the outbreak of COVID-19 that happened towards the end of the quarter. The company’s focus on economy and midscale units with leisure domestic travellers will be beneficial as domestic travel will gradually recover towards the second half of 2020 once the COVID-19 outbreak recedes. Wyndham has a strong balance sheet that should help it to go through this challenging time. Given the possibility of multiple waves of pandemic in the next few years, this stock is only suitable for investors willing to ride out any short-term volatilities.
Data by YCharts
Recent Developments: Q1 2020 Highlights
Wyndham delivered a poor Q1 2020 as the company saw its domestic and international revenue per available room ("RevPAR") declined by 18% and 33% respectively. Much of this was impacted by freezing demand towards the end of the quarter due to the outbreak of COVID-19. As a result, it adjusted EBITDA declined by 4% year over year to $107 million. Similarly, its adjusted diluted EPS also declined by 4% year over year. This brings its adjusted diluted EPS to $0.50 per share.
Source: Q1 2020 Infographic
Earnings And Growth Analysis
The impact of COVID-19 is gradually receding
The outbreak of COVID-19 is having a big impact on Wyndham’s business. As can be seen from the charts below, its RevPAR has declined by 71% year over year and the occupancy ratio has dipped to 23% in mid-April. Fortunately, management noted in its latest conference call that they are now seeing an improvement in its occupancy rate. In fact, the occupancy rate has improved to 31% in early May. As can be seen from the right chart below, Wyndham’s occupancy rate is also much better than the average occupancy rate of 7% of other higher-end hotels.
Source: May 2020 Investor Presentation
Exposures to economy/midscale units should be beneficial in this recessionary environment
Wyndham has a high exposure to economy and midscale units and nearly 70% of its revenues are derived from leisure travels. While this exposure may not be helpful when the economy is in a boom, it will capture those who need to save money in an economic recession. This is because in an economic boom, businesses and individuals are much more willing to spend money on luxury lodgings. However, in this recessionary environment where international air travel is limited, people will focus on controlling their budgets and safety.
Domestic travel by car will be the preferred option for many who want to go on a vacation. Wyndham should benefit from this trend as 87% of its hotels in the U.S. are “drive to” locations. As the summer season arrives and the outbreak of the coronavirus subsides, Wyndham’s exposure to economy and midscale units will be favored by many travellers that will want to save money. Therefore, we believe Wyndham is much better positioned than other hotels such as Hilton (HLT) and Marriott (MAR) that derive a significantly higher portion of their revenues from air travels.
Source: May 2020 Investor Presentation
A strong balance sheet to navigate through this challenging time
Although we are seeing an improvement in Wyndham’s occupancy rate, the company is still far from the peak before the outbreak of COVID-19. Fortunately, the company is in a good financial position to weather this storm. The company has a healthy net debt to adjusted EBITDA ratio of 3.3x (as of December 31, 2019) and has no significant debt maturities until 2023. The company also has $749 million of cash on hand at March 31, 2020. In order to preserve cash, Wyndham has suspended its share buybacks and reduced its dividend payment from $0.32 per share to $0.08 per share.
Source: May 2020 Investor Presentation
Risks And Challenges
Multiple waves of pandemic
While we believe Wyndham should be able to see much of its business recovers if the pandemic recedes in the summer, it is possible that there will be multiple waves of the pandemic in 2020 and 2021. Therefore, its business may continue to be impacted if many people choose to stay at home instead of traveling during the travel season.
Valuation Analysis
Wyndham currently trades at a forward P/E ratio of 36.6x. This is much lower than Marriott’s 91.8x and Hilton’s 72.35x.
Data by YCharts
Investor Takeaway
We think Wyndham will be a better choice for investors seeking exposure to the hotel industry. The brand should benefit from gradually improving domestic leisure travel in the second half of 2020. However, given the possibility of multiple waves of the pandemic, we believe this stock is only suitable for investors with a high-risk tolerance willing to ride out any near-term volatility.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
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