Hyatt Hotels: Proving Resilient, But Investors Too Optimistic Right Now
- Hyatt Hotels Corporation continued to see a strong drop in revenue and earnings in the most recent earnings quarter compared to the previous year.
- While the stock is being driven upwards by vaccine optimism, occupancy rates remain significantly below normal levels.
- While Hyatt stands to benefit from a broader industry recovery, I take the view that the recent rise in the stock price is not sustainable.
In late January, I made the argument that while Hyatt Hotels Corporation (NYSE:H) still has significant risk - like many other companies in the hotel industry - the long-term upside remains favourable.
Central to my argument was the fact that hotel demand as a whole is rebounding comparably well in Greater China, where Hyatt has a growing presence. Moreover, anticipation of a rebound in domestic travel across the Americas this summer is also a reason to be optimistic on the stock.
Since late January, growth in Hyatt's stock price has significantly outpaced that of the S&P 500:
While Hyatt certainly stands to benefit from a rebound in travel demand going forward, there is a significant risk that the market may be overly optimistic on the stock - and the spike in price is based largely on anticipation of a fast rebound in travel demand - rather than the company's fundamentals in their own right.
For instance, Hyatt's Fourth Quarter 2020 Results were impressive in some regards - namely that the company still saw 5.2% growth in net rooms in 2020.
While the company maintained a strong liquidity position with cash and cash equivalents of $1,882 million, RevPAR (or revenue per available room) still saw a sharp drop on a three-month and year ended basis:
Source: Hyatt Fourth Quarter 2020 Results
Additionally, while the average daily rate (the average rate paid by a customer per day during their stay) did not fall by as great a margin - this figure did still fall by double-digits on a percentage basis across most segments.
While RevPAR did see a modest improvement from the third quarter of 2020, the environment for hotel demand still remains quite uncertain.
Given these figures, I fail to see justification for the spike in price that we have seen so far this year.
Attempting to value this company on an earnings basis doesn't necessarily make much sense at this time, given that earnings are artificially down due to COVID-19 and do not reflect company performance under normal circumstances.
Nevertheless, it is interesting to look at fluctuations in the EV/EBITDA ratio for the stock.
When the efficacy of COVID-19 vaccines was made known in the final quarter of 2020, we see that EV/EBITDA spiked - meaning investors are willing to pay a high premium for a rebound in future earnings.
Even with lockdowns continuing and recent concerns that mass vaccinations could take longer than originally hoped - the EV/EBITDA has continued to increase. In other words, this indicates that investors are expecting a sharp and sudden rebound in earnings once COVID-19 becomes a lesser concern and travel rebounds once again.
However, the issue with this is that the higher the premium investors are willing to pay for the stock - the higher the eventual earnings growth must be in order to justify that valuation.
We could well see a situation whereby earnings growth does rebound - but not to the extent that the current price can be justified. For this reason, it is plausible that the recovery in earnings growth is slower than investors had hoped - and the stock price may eventually settle below current levels.
The fact that price is trading at pre-pandemic levels is concerning when one considers that earnings - while making somewhat of a recovery - are still well below that seen before COVID-19.
While COVID-19 vaccines are gradually being rolled out worldwide, investors might gradually realise that they are not the panacea that one might have thought.
For one, separate regions worldwide differ significantly in terms of the pace in which vaccines are being rolled out. Let's take China as an example.
Based on the most recent data available at the time of writing, China had vaccinated 2.82 of every 100 people as of February 9. This is significantly lower than that of 23.23 per 100 people in the United States as of March 1.
Additionally, activity during the Lunar New Year in China - one of the biggest events of the year in that country - were significantly lower than that of last year - with occupancy of 29.7% still well below that of the 58% recorded for the same period in 2019. RevPAR was also half of levels seen in 2019.
While incidences of the virus in China remain low compared to the Western world, domestic travel restrictions still remain quite stringent. For this reason, travel demand in China is still below normal levels, and this continues to have a negative impact on hotel occupancy rates. Greater China has become an increasingly important market for Hyatt - while there has been some optimism that a rebound in hotel demand could counterbalance the comparatively low occupancy rates we are seeing across Europe and the Americas - it is looking increasingly unlikely that occupancy will return to pre-pandemic levels sooner rather than later.
Moreover, while the United States is anticipated to see domestic travel rebound in the summer months, state restrictions across a select few major cities still remain in place. For instance, travellers from non-contiguous states must at the time of writing test negative for COVID-19, or undergo a mandatory 10-day quarantine.
While many other states across the U.S. have travel advisories in place rather than outright restrictions - these can be subject to change if the number of cases accelerate - and this uncertainty could still discourage domestic travel due to such uncertainty.
Taking this into account - there may be some downside risk for Hyatt going forward - as the vaccine optimism that has been driving the stock upwards starts to fade.
Over the longer-term, I take the view that Hyatt is a strong business. Given that it has managed its liquidity position quite well and has seen some rebound in growth across major markets such as China - the longer-term growth path looks favourable.
However, I take the view that the stock is being overly driven by vaccine optimism in the short to medium-term and do not see the current growth in stock price as being sustainable.
Additional disclosure: This article is written on an "as is" basis and without warranty. The content represents my opinion only and in no way constitutes professional investment advice. It is the responsibility of the reader to conduct their due diligence and seek investment advice from a licensed professional before making any investment decisions.
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