The state of the hotel industry is generally a good
barometer regarding the health of the global economy. When businesses are
optimistic about their prospects for the upcoming months and the year ahead,
travel budgets are boosted higher, enabling hotel owners and operators to
increase rates as rooms get occupied. Likewise, when labor conditions are
strong and consumer sentiment is bullish, people feel more confident and
comfortable traveling for leisure purposes.
So, when Hilton (HLT 78.55, +4.23, +5.69%), one of the largest hotel owners and operators in the world, issued better-than-expected 4Q18 results with upside guidance for 1Q19 and FY19 this morning, fears surrounding a more severe global economic slowdown were abated, providing a positive catalyst for the broader markets today and for other hotel stocks, like Marriott (MAR +3%) and Hyatt (H +4%), as well. While the company did ratchet its FY19 RevPAR growth outlook modestly lower to 1-3% from its original forecast of 2-4%, this was taken in stride by investors as the guidance still indicates a stable environment -- again, suggesting that worries from late 2018 about the global economy were overdone.
Furthermore, although the company did cite some softness in China, conditions hardly fell off a cliff there, with Q4 RevPAR growth of 5%. On that note, HLT clearly isn't anticipating that business will erode dramatically in the broader Asia Pacific region, as 75% of its robust construction pipeline is situated within that specific geography.
In short, HLT's management summed up business this way during its earnings call: "Macro indicators continue to support generally favorable fundamentals and a good backdrop for continued pricing increases despite modest deceleration in GDP expectations versus prior estimates." Therefore, the company still sees a green light to go ahead with its ambitious room expansion plans, which we discuss in more detail below.
HLT posted EPS of $0.79, up a solid 46% year/year, beating the consensus by a comfortable $0.10/share margin. Rewinding back to its Q3 report, HLT issued downside guidance for Q4, forecasting EPS of $0.66-$0.71 (vs. the $0.71 prior consensus), with RevPAR growth of 2-3%. Obviously, the company outperformed its own earnings expectations by a decent amount. This was mainly driven by better-than-expected unit growth, up 7% from last year, as RevPAR growth came in at the low end of its forecast at +2%.
The company has really been hitting the accelerator in terms of expansion. In 2018, HLT recording its most active year for openings in its history, opened more than one hotel per day, summing to additions of 450 total hotels and 57,000 rooms, including 142 hotels in the fourth quarter. In particular, its luxury brands, such as LXR Hotels & Resorts, have been a focal point for its development plans. The build out of HLT’s high-end brands has also led to stronger management franchise fees, which jumped by 14% in the quarter, ahead of its expected 9-11% range.
Of course, the key metric for HLT and other hotel operators is Revenue per Available Room, or, RevPAR. It's calculated by multiplying a hotel's average daily room rate by its occupancy rate, and it is used to assess whether a hotel is able to fill available rooms at an average rate. An increase in RevPAR means that its average room rate or its occupancy rate is improving.
Over the past couple of quarters, the company’s RevPAR has remained stable at 2%, though it has slipped from the 4% range seen in 1H18. While group business remained healthy throughout the year at 4%, HLT noted that there was some degradation in corporate transient trends late in Q4. Additionally, leisure travel fell a little short of expectations, but some of the softness here was related to the timing of events from the year ago comparable period.
Geographically, Europe was a standout performer at +7.2% due to stronger than expected U.S. travel to the U.K. In Asia Pacific, a slowdown in Chinese leisure travel did impact growth (+3.4%), as did negative weather conditions and natural disasters.
Relative to its key peers Marriot (MAR) and Hyatt (H), HLT's RevPAR growth has been generally in-line with the competition. Specifically, MAR and H have both averaged growth of about 3.5% over the past four quarters, compared to about 3% for HLT. However, HLT has been outperforming them in total revenue growth by a considerable margin over the past few years, cutting into their market share, thanks to its development programs.
It was HLT's upside guidance that really eased concerns about a sharp economic downturn. In its earnings press release, it guided for Q1 EPS of $0.73-$0.78 (year/year growth of 99%), well ahead of the $0.59 consensus, on RevPAR growth of 1-3%. For FY19, it sees EPS of $3.66-$3.78 vs. the $3.17 consensus, also with RevPAR growth of 1-3%. As we noted above, that is a slight down-tick from its prior guidance for RevPAR growth of 2-4%.
During its earnings call this morning, HLT stated that group trends are looking to be solid, with 2019 bookings up in the mid-single-digits, modestly ahead of last year's growth. The company is anticipating that a continued deceleration of economic growth in China will provide a headwind in 2019, though not an overly vigorous one. Indeed, it is still expecting mid-to-high single digit RevPAR growth in China.
What really lends confidence to investors, though, about the global business climate is its development plans. 2018 was a record year for construction starts and signings, with more than 100,000 new rooms on track for this year. Approximately 30% of the company’s pipeline is in Asia Pacific, and more than 75% of its Asia Pacific pipeline is already under construction.
Key Takeaways: Heading into the fourth quarter earnings season, fears of a serious global economic slowdown -- and perhaps a recession -- were gripping the markets and investors' psyche. But as we have progressed through the earnings season, those concerns have diminished as corporate guidance has been better-than-feared, indicating a more tepid slowdown. With leading hotel owner and operator HLT only slightly lowering its RevPAR outlook for 2019 while providing upside earnings guidance, the idea that the global economy is on the edge of a meltdown has been all but quashed. As for HLT itself, its story revolves around its ambitious development plans, especially in the Asia Pacific region, as it looks to grab market share from its larger peers MAR and Wyndham Hotels (WH).
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