EUR 850.00 For Business Accounts Only

Morningstar | Hilton’s Brand Resilient in an Incrementally More Cautious Environment; Shares Fairly Valued

Hilton’s brand (source of its narrow moat) remains strong, as its second-quarter results and 2019 outlook of 1%-2% revPAR growth was in line with our 1.5% estimate. We don’t plan to materially change our $90 fair value estimate that incorporates sales and operating margins averaging roughly 8% and 18.5% annually through 2023, leaving shares near our fair value estimate.

Hilton’s brand has been strengthening, in our view. This is witnessed by its revPAR index (metric of market share) growing 230 basis points year to date with all 17 brands and regions gaining. Hilton’s portfolio quality aids its industry-leading loyalty program that represented 63% of total room nights, up 500 basis points from the prior year, and versus 60% and 50% in 2018 and 2014, respectively. This loyalty mix is well ahead of peers, which we calculate averaged a combined 44.5% and 40.1% of room nights from loyalty members in 2018 and 2014, respectively, buoying the view of a strengthening brand. The strong revPAR premium and loyalty presence in turn drives unit growth, which rose 6.8% in the quarter (the 12th straight quarter of at least 6% growth), well above the long-term 2% industry average in the U.S. And we expect this strength to sustain, as Hilton’s pipeline of 373,000 rooms represents an industry leading 40% of its existing unit base, supporting our unchanged view that the company can average mid-single-digit unit growth on average over the next 10 years.

While Hilton’s brand remains intact, the outlook for industry demand has softened slightly. Hilton revised its 2019 revPAR outlook down to 1%-2% growth from 1%-3% prior, driven by softer leisure demand in China (high-single-digit percent of total rooms) and some incremental caution in global corporate spend. This softness was illustrated in APAC revPAR growing just 2% in the quarter, which resulted in its two-year stacked revPAR growth dropping to 9.3% in the quarter from 12% last quarter, the weakest print since late 2017.

We plan to maintain our 2019 revPAR estimate of 1.5%. For the quarter revPAR grew 1.4%, near management's guidance for a 1.5% lift. Regionally, U.S. revPAR remained anemic, up 1%, while Europe maintain more solid 5% revPAR growth. Meanwhile, Middle East/Africa revPAR increased only 0.2%, as oversupply remains a challenge.