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Morningstar | Narrow-Moat Hyatt's Solid revPAR and Unit Growth Support Its Brand Advantage; Shares Undervalued

We don't plan a material change to our $75 valuation, as narrow-moat Hyatt's solid third-quarter 2.8% and 7.6% revPAR and unit growth, respectively, are tracking near our respective 2018 forecast of 4% and 7%. After being overvalued earlier in the year, Hyatt shares are now undervalued, as the market reacts to a potential industry cyclical slowdown, something that we have long modeled (with revPAR decelerating in both 2019 and 2020).

Hyatt reported revPAR growth of 1.4% in its core U.S. market, above Hilton's 1% rate and InterContinental's drop of 0.5%. Many of Hyatt's lifestyle brands performed well with Andaz, Centric, and Unbound growing revPAR 7.1%, 7.5%, and 6.5%, respectively. That said, the Place and House brands, which are a key drivers of unit growth (representing 42% of total room growth in the third quarter), saw a 0.9% decline and 0.1% lift in revPAR, respectively, which is something to monitor in future quarters.

Total room growth was 7.6% with Place (24% of total rooms) and House (7%) posting healthy 11% and 12% lifts, respectively. Meanwhile, the company's other young brands, Andaz, Centric, and Unbound saw a combined 60% increase in room growth, representing 34% of Hyatt's total unit increase, despite making up only 6% of total rooms.

Hyatt's pipeline reached 73,000 total rooms, up 6%, representing 38% of its existing unit base, amongst the top in the industry (Hilton leads with 41%). As a result, Hyatt maintained its 2018 and 2019 unit growth guidance of 6.5%-7% and 7.5%, respectively. We don't plan much change to our 7% 2018 room growth forecast, or our view of nearly 5% annual unit lift over the next decade.

Meanwhile, Hyatt tightened its 2018 revPAR growth target to 3.25% to 3.75% from 3%-4%, and we may slightly lower our 4% estimate as a result. But our valuation shouldn't materially change, especially as we account for additional asset sales in the quarter. Also, Hyatt also gave 1%-3% 2019 revPAR guidance versus our 2% estimate.

Since mid-July, Hyatt has announced three tuck-in acquisitions and one asset sale, amounting to a net purchase of around $700 million. The company remains on track to hit its $1.5 billion asset sale target by 2020, having achieved $1.1 billion to date; we continue to agree with the strategy to become more asset-light, as it will aid margins and ROIC.

Hyatt also continues to allocate capital via repurchases, as it bought $66 million of its shares in third quarter and another $63 million in October. We are favorable on recent buybacks as they have come at a discount to our $75 fair value estimate, but we are not as positive on Hyatt's $500 million plus it bought back earlier in the year when the stock was overvalued. We hope management can be more opportunistic with future buybacks with its just announced $750 million repurchase program.