EUR 850.00 For Business Accounts Only

Morningstar | La Quinta offers long-term growth, supporting Wyndham Hotels' brand and switching cost advantages.

We expect Wyndham Hotels & Resorts to gradually expand 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 Wyndham has a handful of the top 10 brands based on guest satisfaction, according to J.D. Power) and the industry’s fourth-largest loyalty program by membership (around 70 million at the end of 2017, including La Quinta), which encourages third-party hotel owners to join the platform. Also, Wyndham has 10% and 5% share of existing U.S. and global hotel rooms, respectively, with a pipeline that represents around 22% of its current unit base. As a result, we see room growth averaging around 3% over the next decade, above the 2% long-term U.S. supply growth average.With all but 2 of its 8,422 hotels managed or franchised, Wyndham has an attractive recurring-fee business model with healthy returns on invested capital, as these asset-light relationships have low fixed costs and capital requirements. This asset-light model creates switching costs, given 10- to 20-year contracts that have meaningful cancellation costs for owners.We see the 2018 acquisition of La Quinta as a strategically strong fit that supports Wyndham’s intangible-asset-driven narrow moat while enhancing long-term growth. La Quinta’s 13 million loyalty members and top-three midscale brand guest satisfaction ranking should lure third-party owners to join Wyndham. Further enticing third-party unit growth is the added scale of La Quinta’s 90,000 rooms, which can drive down procurement costs for owners.Cyclicality and overbuilding are the main risks for shareholders. Typically, U.S. lodging recoveries last seven to nine years; 2018 represents the ninth year of the current U.S. cycle. We model this U.S. cycle to last through 2019; we believe this is reasonable, considering that over 2009-17, U.S. demand and supply have increased around 30% and 10%, respectively, with supply growth roughly matching demand growth in 2018.