- Host Hotels & Resorts has invested significantly into its hotel portfolio throughout the pandemic.
- Luxury travel demand is showing clear signs of a strong recovery.
- For these reasons, I envisage further upside for the stock.
Investment Thesis: With Host Hotels & Resorts (NASDAQ:HST) having invested in its portfolio significantly during the pandemic, along with travel demand rebounding strongly, I see further upside for the stock and predict a five-year target price of $37.
Like many businesses in the hotel REIT sector, Host Hotels & Resorts (HST) came under pressure during the COVID-19 pandemic, due to both a sharp drop in bookings along with the fact that due to its REIT exposure, the company was not able to conserve cash reserves to the extent that non-REIT businesses could.
That said, we see that price rebounded strongly heading into 2021, based on both a growing resurgence in demand for travel as well as vaccine optimism.
That said, we see that price has remained stationary for the last couple of months. Depending on upcoming earnings performance on July 29, we could see a situation where returns for the stock are more moderate going forward.
In this regard, the purpose of this article is to:
1) Assess the company's prospects going forward from a competitive standpoint.
2) Estimate a five-year target price for the company based on projected earnings growth.
As the largest lodging REIT in the world, Host Hotels & Resorts has significant exposure to the luxury and upscale hotel market.
Moreover, in spite of the pressures posed by the pandemic, the company has been significantly expanding its hotel portfolio - most recently including a $200 million investment for the Baker's Cay Resort in Key Largo.
What is also particularly encouraging is that when looking at the previous financial quarter, Host Hotels & Resorts saw only a slight decrease in cash and cash equivalents from the prior year.
Moreover, when looking at the 2020 annual report, we see that cash and cash equivalents actually increased quite significantly from 2019.
This is welcoming as it means that even in spite of the drop in revenues throughout the pandemic, Host Hotels & Resorts has continued to upgrade its hotel portfolio while concurrently keeping sufficient cash on hand to cover short-term expenses.
Given the company's status as the largest lodging REIT, Host Hotels & Resorts has demonstrated that it has the means to sufficiently expand its portfolio during a pandemic, and this puts the company at a distinct advantage to smaller competitors who may not have the cash resources to expand as quickly.
In terms of the domestic luxury travel market in the United States, the pandemic is no longer an impediment to travel.
In fact, continuing international travel restrictions have led to a surge in domestic travel demand, with consumers willing to pay higher prices after having travel plans disrupted in 2020 - a phenomenon that is increasingly becoming known as "revenge travel".
Should this reflect positively on earnings for Host Hotels & Resorts at the end of July, then I anticipate that further upside for the stock could lie ahead in spite of the prior rise due to vaccine optimism - travel demand is clearly rising once again and growth in earnings would justify a rising stock price.
Target Price Projection
For the years ended 2018, 2019, and 2020, EPS came in at $1.47, $1.26 and -$1.04 respectively.
In making a five-year target price forecast, I make the following assumptions:
- EPS will rebound to the 2019 level of $1.26 by 2022 and continue growing at a rate of 20% per year as the industry experiences significant growth due to a rebound in travel demand.
- The terminal P/E ratio is assumed to be 20x, which is roughly the midrange of the P/E ratio observed between 2015 and 2019.
- The discount rate is assumed to be 7%, as a proxy for the assumed long-term rate of return on the S&P 500.
- The target price is calculated as the product of the terminal P/E ratio and the present value of diluted EPS in year 5.
On the basis of these assumptions, I calculate that the stock could see a potential target price of $37 in the next five years.
When considering the pent-up demand for luxury travel, and the fact that the market could see above-average demand for the next couple of years as would-be vacation makers have postponed travel, I do not see an average growth rate of 20% as being unrealistic.
Taking into account the significant surge that we are seeing for luxury travel demand, along with the fact that Host Hotels & Resorts has continued to reinvest significantly in luxury properties throughout the pandemic, I see further growth potential ahead.
For this reason, I take a bullish outlook on the company at this point in time.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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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