Shares of Hilton Worldwide Holdings Inc. HLT are riding high on the rise in rate and occupancy, robust demand at the company's international hotels and improved strategic initiatives. These efforts have aided the company to drive its share price by 30.2% in a year, outperforming the industry 's increase of 20.8%. However, intense competition and cyclical nature of the industry remain concerns. Let's delve deeper.
In a bid to maintain its position as the fastest-growing global hospitality company, Hilton is continuing to drive unit growth. In 2017, the company witnessed net unit growth of 18,400 rooms. Further, in the first quarter of 2018, the company achieved net unit growth of 7,100 rooms and witnessed an increase of 7% from the prior-year quarter. For 2018, the company projects an approximate 6.5% net unit growth. It also continues to have more rooms under construction in Europe, the Middle East and Asia Pacific than any other hotel chain. The company expects greater international expansion in 2018.
Hilton's broad geographic diversity lowers the effect of volatility in individual markets. Evidently, Mexico and Canada have been experiencing strong leisure demand, leading to solid RevPAR growth. Further, Europe's RevPAR trends are being supported by favorable exchange rates as well as strength in regions including Spain, the U.K., Germany, Turkey and others. Meanwhile, strength in China and Japan has led to solid RevPAR growth in the Asia Pacific region as well.
The company has created one of the largest loyalty programs, Hilton Honors. With about 74 million members, this network has created an extremely valuable asset for the company. In 2017, the company added over 11 million members to the program. Further, more than 3 million members were added to Hilton Honors in the first quarter of 2018. In the meantime, innovations such as the Hilton Honors app continue to drive growth in the program.
Further, Hilton has transformed into a capital-light operating business backed by the spin-offs of a portfolio of hotels and resorts as well as timeshare business. Post spin-off, the company expects to be a resilient, fee-driven business with disciplined strategies. In fact, the focus is expected to be on growing market share, units, free cash flow per share as well as preserving its strong balance sheet and accelerating return of capital. Furthermore, as Hilton's unit growth is mostly financed by third parties, the company is capable of generating substantial returns on minimal capital investment.
Compared with other big hotel chains, Hilton has a lower mix of luxury and upper upscale rooms. An increasing supply of such upscale hotels may not have a rewarding impact on Hilton. Unless the company develops its luxury portfolio alongside its other rooms, it has a good chance of losing out on the emerging demand.
Increasingly, the company also faces competition from new channels of distribution in the travel industry. Additional sources of competition include large companies that offer online travel services as part of their business model such as Alibaba (BABA), search engines such as Google, and peer-to-peer inventory sources such as Airbnb and HomeAway, allowing travelers to book stays on websites that facilitate short-term rental homes and apartments from owners, consequently providing an alternative to hotel rooms. Further, intense competition from large hotel chains like Marriott MAR
and Hyatt H
as well as smaller independent local hospitality providers remains a potent threat. Zacks Rank & Key Pick
Hilton currently carries a Zacks Rank #3 (Hold). A better-ranked stock from the same space is Marriott Vacations Worldwide Corporation VAC
, carrying a Zacks Rank #2 (Buy). The company's earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Marriott International (MAR): Free Stock Analysis Report Hyatt Hotels Corporation (H): Free Stock Analysis Report Marriot Vacations Worldwide Corporation (VAC): Free Stock Analysis Report Hilton Worldwide Holdings Inc. (HLT): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research