EUR 850.00 For Business Accounts Only

Morningstar | Hilton's Strengthening Brand Displayed in 2Q, Aided by a Continued Healthy Travel Environment

We see little reason for meaningful change to our $80 fair value estimate or our stance that Hilton is one of the best-positioned operators (driven by strong brands, loyalty, and scale) after the company reported solid results across all segments and geographies, aided by a healthy global travel environment. We see shares as fairly valued, trading at 15 times 2018 enterprise value/EBITDA.

Hilton's intangible brand advantage (source of its narrow moat) is intact, witnessed by its 9% pipeline growth to 362,000 rooms in the quarter, representing an industry leading 41% of its existing 871,000 keys. This development growth is being driven by Hilton's strong brands (which have 114% average market share), 78 million loyalty members (driving nearly 60% of total room nights, up 120 basis points), and scale (which offers lower distribution costs to franchisees). As a result, we remain comfortable with our existing 6.4% and 5.4% net room growth estimates for 2018 and annual average over the next five years, respectively, levels that are well above the long-term U.S. industry average annual supply lift of 2%.

The company's total 4% revenue per available room in the quarter (versus its 3%-4% guidance) was driven by broad strength across the travel ecosystem. Hilton's demand for leisure stays remained stable at around 3% revPAR growth during the quarter, while corporate transient is tracking to a 3% revPAR lift this year versus roughly 1% last year (aided by increased U.S. business confidence), and the group is set to increase revPAR about 4% in 2018, with group pacings for all future periods strengthening (up low double digits). Meanwhile, Hilton is seeing strength in Europe (revPAR up 6.3% in the quarter), Asia-Pacific (up 7.3%), and the Americas (up 6.5% excluding the U.S., which was up 3.5%).

Hilton largely maintained its 2018 outlook, keeping total revPAR growth at 3%-4% and EBITDA up $5 million at the midpoint to $2,085 million. We do not expect much change to our 2018 revPAR and EBITDA estimates of 3.5% and $2,070 million, respectively, or to our 7% average annual revenue growth over the next five years, with operating margins reaching 18.5% in 2022 from 15% in 2017.