EUR 850.00 For Business Accounts Only

Morningstar | Wyndham's Brand Development and La Quinta Growth Opportunity Support Its Brand Advantage

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 the company's roughly 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 75 million), which encourages third-party hotel owners to join the platform. Also, Wyndham has 15% 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 just over 3% during the next decade, above the 2% long-term U.S. supply growth average.With all but two of its 9,000-plus 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 ranks as a top-three midscale brand based on third-party guest satisfaction surveys, which should lure third-party owners to join Wyndham. Further, the brand is not in 30% of the regional tracks followed by Smith Travel Research, despite an increase in the revPAR index (metric of share) since its acquistion and its high retention rates. As a result, we think La Quinta can reach 2,000 hotels long term from 900 today.Cyclicality and overbuilding are the main risks for shareholders. Typically, U.S. lodging recoveries last seven to nine years; 2018 represented 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 2009-18, U.S. demand and supply increased around 30% and 10%, respectively, with supply growth expected to roughly match demand growth in 2019.