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Morningstar | Wyndham's Brand Development and Long-Term La Quinta Growth Opportunity Offer Catalysts for Shares

Wyndham's first quarter offered signs of brand quality development (higher owner retention, unit growth, and direct distribution reach), which along with growth potential of the La Quinta concept (acquired in May 2018 and 36% of first-quarter sales) provide catalysts over the next several years that can help close the valuation gap between it and narrow-moat Choice. We see both operators offering high-single-digit average annual sales and EBITDA growth over the next five years, yet Choice trades at 15 times 2019 enterprise value/EBITDA, above the 12 times investors currently pay for Wyndham. We plan to increase our $72 Wyndham valuation around $2 because of a slight increase in our out-year room-growth forecast and view shares as attractive.

Wyndham already has durable brands, the source of its narrow moat, with three of the top five economy and midscale segment concepts, according to J.D. Power guest satisfaction surveys. Still, we see signs of increasing brand quality. Wyndham is terminating fewer rooms (9,500 removed in the quarter versus 14,000 last year), signaling that more of the remaining units are meeting company standards. Also, Wyndham saw organic net unit growth of 3% in the quarter, an acceleration from the 2% in all of 2018, while its renewal rate increased to 95% from 94% last year, implying that more hotel operators are finding value in the company's brand, loyalty (fourth largest in the industry at 75 million members), and new cloud-based reservation and property management platform (which helped drive revenue booked on company channels up 320 basis points to 65%).

The La Quinta brand also provides a growth catalyst for shares. The brand is not in 30% of the regional tracks followed by Smith Travel Research, despite an increase in the revenue per available room index (metric of share) since its acquisition, and its high 98% retention rates. As a result, we think La Quinta can reach 2,000 hotels long term from 900 today, providing years of growth.

The integration of La Quinta is going well, witnessed by Wyndham increasing synergy guidance $2 million at the midpoint to $64 million-$70 million. Although we plan to maintain our $70 million full run-rate synergies forecast, we see benefit from the brand now being on Wyndham's platform, as La Quinta will have access to more secure credit payments, real-time revenue optimization, and contact to more travel agents, all of which can help attract and retain hotel owners.

Wyndham reported solid total and U.S. organic revPAR growth of 1%, despite a 300-basis-point headwind to the U.S. metric from last year's hurricane benefit. Wyndham maintained 2019 guidance of $2.11 billion-$2.16 billion in revenue (versus our $2.15 billion estimate), $605 million-$620 million in EBITDA ($617 million), 2%-4% of room growth (3.5%), and 1%-3% of organic revPAR growth (1.5%), in line with our forecast, which we don't plan to meaningfully change.