EUR 850.00 For Business Accounts Only

Morningstar | Fine-Tuning Narrow-Moat Wyndham Forecast After Our Talk With the Company; Shares Undervalued

As a reminder, narrow-moat Wyndham Hotels and Resorts was spun off from Wyndham Worldwide (which also included timeshare operations and is now called Wyndham Destinations) in June 2018. As disclaimed in our initial Wyndham Hotels model, our forecast was based on the company's Form 10 disclosure, since a 10K will not be available until early 2019 after Wyndham's full-year results are reported. Further, our estimates include the La Quinta acquisition, which closed just before the hotel operations spin-off. After a recent discussion with Wyndham Hotels investor relations, we are adjusting our operating expenses higher for La Quinta to better align with management's integration targets (which include between $55 million and $70 million in synergies by the middle of 2019), while maintaining our revenue forecast. We now expect operating margins to average 25% over the next five years (versus just below 27% previously), while continuing to expect annual sales growth of more than 14% (which benefits in the near-term from the La Quinta acquisition). Our revised fair value estimate is $72, down from $76, still leaving shares at an attractive margin of safety.

We reiterate our view that Wyndham Hotels and Resorts will gradually expand its room share in the hotel industry and sustain a brand intangible asset and switching cost advantage. This view is supported by its 40% share of all U.S. economy and midscale branded hotels, where it has eight  of the top 10 brands based on guest satisfaction, according to J.D. Power. One of those brands is the recently acquired La Quinta, which we view as a strategically strong fit that will enhance Wyndham's long-term growth.