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Morningstar | Hilton's 1Q Update Drives Increased Conviction to Our Long-Held View That Its Brand Is Strengthening

We have greater conviction in our long-held view that Hilton's brand advantage, the source of its narrow moat, is strengthening, as the company increased revenue per available room by 230 basis points and loyalty membership grew 20% in the first quarter. We plan a mid-single-digit percentage increase to our $84 fair value estimate, driven by the time value of money and higher expected interest from third-party hotel owners in joining Hilton’s portfolio, leading to an increased room growth forecast of 5.6% over the next five years, from 5.2% previously.

Hilton's focus on on-trend hotel design, innovation (like digital keys and room selection), and high-quality service is allowing it to gain revPAR share across all segments and regions. This in turn is driving customer loyalty, with 90 million members, trailing only Marriott’s and InterContinental's 100 million-plus. Importantly, these members are engaging, with over 60% of room nights coming from loyalty accounts, up 170 basis points from last year, and above all of its peers (we believe Marriott is second, with around a mid-50% of its room nights from loyalty). With its brands gaining revPAR share and a growing loyalty demand pool to draw upon, we think the incentive of third-party hotel owners to join Hilton's portfolio is strengthening.

Trading at 15 times 2019 enterprise value/EBITDA, we see Hilton shares as fairly valued and recommend investors seeking lodging exposure review narrow-moat Wyndham Hotels, as it offers high-single-digit average annual sales and EBITDA growth over the next five years, similar to peers, while trading at an unwarranted valuation discount—nearly 12 times 2019 EV/EBITDA versus roughly 15 times for Choice, its closest peer.

First-quarter revPAR grew 1.8% versus 1%-3% guidance. Regional performance was mixed, with Europe posting solid 3.2% revPAR growth and the outlook for 2019 now expected at the higher end of 1%-3% (versus within the range of 1%-3% prior), driven by a stronger calendar. Meanwhile Asia-Pacific and Middle East/Africa showed weaker 1% revPAR growth and 5.7% decline, respectively. In Asia-Pacific, China leisure travel slowed, although it has recently picked up, resulting in a revised 2019 revPAR outlook for the region of 3%-5% growth versus a mid-single-digit increase previously. In Middle East/Africa oversupply and softening leisure travel is driving a 2019 revPAR outlook for a low-single-digit decline versus flat prior. Overall, Hilton's 2019 outlook was largely maintained and remains near our forecast. For the year, it still expects total revPAR growth of 1%-3% (versus our 1.5% estimate), unit growth of 6.5% (6.6%), with EBITDA raised $17.5 million at the midpoint to $2.265 million-$2.305 million ($2.27 million) on higher fee revenue. We don't plan any material change to our 2019 estimates.