EUR 850.00 For Business Accounts Only

Morningstar | Narrow-Moat Hyatt's Brand Strengthens Despite Near-Term U.S. and China Headwinds

Hyatt Hotels' first quarter offered two takeaways for investors. First, our view that the company's brand--the source of its narrow moat--is strengthening was supported by pipeline and net organic unit growth of 25% and 7%, respectively. Second, weaker revenue per available room in the United States (down 0.3%) was driven by market dynamics that are expected to ease. Overall, Hyatt's results are tracking in line with our 2019 forecast for 6% and 1% sales and EBITDA growth, respectively. As a result, we don't plan a material change to our $76 fair value estimate, leaving the shares fairly valued.

Hyatt's loyalty program and brand offering continue to generate robust development growth, supporting our view that the company can post industry-leading average annual net room growth of 6.3% over the next five years. Hyatt's loyalty member signings increased 40% in the quarter and now represent 41% of total room nights (up 500 basis points), adding incentive for third-party hotel owners to join the company's umbrella. And a partnership with Small Luxury Hotels stands to drive stronger loyalty in the future, as it adds a few hundred luxury properties (on a total existing base of roughly 800 Hyatt hotels) where Hyatt's portfolio is currently underexposed. As a result, Hyatt's pipeline of 91,000 rooms is an industry-leading 43% of its existing room base, and the company's 7.3% net unit growth in the quarter was the sixth straight quarter above 7%.

Hyatt's total revPAR growth of 1.8% was in line with results at narrow-moat peer Hilton. But Hyatt's U.S. revPAR decline of 0.3% was below Hilton's 1.8% increase. The relatively weaker result was due to industry U.S. select service (where Hyatt has outsize exposure) supply surpassing demand by 150 basis points.

Importantly, Hyatt said that its U.S. select service revPAR share still increased slightly in the quarter and that it expects market headwinds to wane the rest of the year, alleviating our concerns that its competitive position is weakening.

We are also not concerned about Hyatt's Greater China revPAR decline of 2.7%, as the company gained revPAR share in the region when excluding one-time renovations and contract changes. Further, Hyatt's room signings were up 20% in the region, buoying the view that its competitive position is well intact in China. In addition, the company expects China's government stimulus to drive a recovery in the second half of this year, a view echoed recently by Hilton's management.