EUR 850.00 For Business Accounts Only

Morningstar | Wyndham Sees Solid 4Q Results, Driven by La Quinta and Various Initiatives; Shares Attractive

Wyndham's brand advantage, the source of its narrow moat rating, is intact, as its La Quinta brand (around 25% of 2019 EBITDA) and renovations of other concepts drove a healthy 6% and 11% organic sales and EBITDA growth, respectively, in 2018, in line with our forecast. Although we don't plan a big change to our $72 fair value estimate, we find shares attractive, trading at just 11 times our 2019 enterprise value/EBITDA, an unwarranted discount to the 13.5 times multiple investors currently award narrow-moat peer Choice.

Our view that the La Quinta brand, acquired in May 2018, remains a growth driver for Wyndham was supported by its 5.2% growth in revenue per available room in the fourth quarter, above the 2% consolidated lift. Further, the brand has averaged 140 basis points of revPAR index share gains since being acquired. The brand's strength has caused Smith Travel Research to upgrade it to the upper-scale from midscale segment, which we believe highlights the quality of the concept and can aid its unit growth (which we think can double to around 2,000 units over the next several years). Although we already account for the brand's strength and growth opportunity--we expect it to grow 10 percentage points above consolidated growth starting in 2020--we are nonetheless encouraged.

We see various initiatives aiding room growth acceleration for other brands starting in 2019. For example, we're pleased that Wyndham is discussing a potential renovation plan for its Days Inn brand, as past refreshes of Super 8, Microtel, and Wingate concepts have driven sustained revPAR share gains. Also, call center initiatives have been rolled out in 3,000 of the company's 8,000 hotels, resulting in a 16.5% and 25% lift in daily rate and loyalty enrollments, respectively, aiding the direct channel that made up 62% of total 2018 U.S. room nights, up 490 basis points.

The evidence of revPAR share gains and growing loyalty presence should help drive total organic net unit growth to around 3% starting in 2019 (versus managements 2%-4% guidance and our 3.5% estimate) from 2% reported in 2018.

Wyndham is still deleting rooms at a high rate (we calculate it removed about 9% of its ending 2017 room base in 2018). That said, deletions rates could start to moderate, as the U.S. portfolio is no longer seeing net unit declines (the U.S. has seen net unit growth each of the last three quarters).

Finally, Wyndham plans to complete La Quinta's integration during the first half of 2019, versus mid-2019 prior, and extract $60 million-$70 million in synergies, versus $55 million-$65 million previously (compared with the $65 million we model).