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Morningstar | Wyndham Sees Strong revPAR With Signs of Room Growth Acceleration on the Horizon; Shares Undervalued

Wyndham's brand advantage, the key source of its narrow moat, was evident in its third-quarter results that showed revenue per available room share gains with signals that organic unit growth is near a potential acceleration, in line with our forecast. Although we don't plan a big change to our $72 fair value estimate, we find shares attractive, even after a 4% uptick, trading at just 11 times our 2019 EV/EBITDA, an unwarranted discount to the 13.5 times multiple investors currently award peer Choice.

The company's brand advantage was supported by impressive U.S. (63% of total rooms) organic revPAR growth of 2.4%, 1 to 1.5 percentage points above market levels, and well above the 1% lift Hilton reported and InterContinental's 0.5% drop.

We believe revPAR growth is supported by Wyndham's ongoing focus on quality control, as it looks to eliminate underperforming hotels. Encouragingly, Wyndham commented that U.S. termination rates are moderating, supported by our calculation that organic U.S. terminations have amounted to just 4% of the existing base year to date versus the consolidated 7%-8% of the past several years, and by management's comments that the region saw a return to net unit growth in the third quarter. This supports our view of 3.5% annual unit growth in 2019-22, an acceleration from the 2.8% modeled in 2018.

We see several other factors that support Wyndham's brand advantage. First, adding "By Wyndham" at the end of hotel names is increasing awareness (9% increase in searches) since its launch in April. Also, Wyndham is having its call center take front-desk reservations, which it says is lifting pricing 160 basis points and loyalty enrollment 40%-50%. Finally, Wyndham's growing loyalty base, which we estimate is above 70 million, including La Quinta, and direct booking channels that are growing ahead of transactions occurring on online travel agencies should incentivize franchisees to join in the coming years, supporting the brand advantage.

International results were also solid, with 6% organic revPAR growth, and termination rates that were 70% below the average of the prior four quarters. Meanwhile, development growth remained healthy, with 5% organic pipeline growth.

We are also encouraged that Wyndham bought back $44 million in stock during the third quarter and is looking to be more aggressive with repurchasing on the market pullback. We see this as a good allocation of capital, given the discount shares are currently trading at to our fair value estimate.

Finally, Wyndham essentially maintained 2018 guidance. Organic room growth was kept at 2%-4% versus our 2.8% estimate, organic revPAR reiterated at 3% compared with our 2.8% forecast, while the midpoint of EBITDA stayed at $505 million, near our $500 million estimate.