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Hyatt (H) Rides on Expansion & Acquisition Amid Competition

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Hyatt Hotels Corporation (H - Free Report) banks on differentiated brand portfolio, relentless expansion, and various acquisition strategies to drive revenues and profits. However, intense competition, and weakness in owned and leased hotel segment remain concerns.

Notably, shares of Hyatt have marginally lost in the past year, outpacing the industry’s collective decline of 17%. The company posted better-than-expected earnings for 12 straight quarters. Given the company’s strong brand recognition, efforts to enhance guest experience and increased focus on operational excellence, it is likely to perform well in the quarters ahead.


Expansion Strategies Bode Well

Hyatt aims to differentiate its brands from one another by providing distinct travel experiences. Hyatt is also consistently trying to expand its presence worldwide. It also has expansion plans for the Asia Pacific, Europe, Africa, the Middle East and Latin America.

The company’s new signings across its brands, globally,consistently outpaced its openings.This trend is expected to continue in 2018. The company’s development pipeline grew roughly 6% in the third quarter compared with the prior-year quarter. For 2018, it expects to grow units on a net room basis by roughly 6.5-7%, reflecting 60 hotel openings.

Acquisitions & Divestitures — Major Growth Driver

Hyatt is strongly invested in strategies related to various acquisitions and divestitures that can drive growth for the company. In 2017, it acquired Miraval Group, which extended the Hyatt brand beyond traditional hotel stays into a wellness category that resonates well with the high-end travelers. Moreover, the company is also increasing its focus on private accommodations, which is another fast-growing travel segment. This segment has the potential to extend the Hyatt brand beyond traditional hotel space, and is a fantastic fit to the Hyatt portfolio and its brand positioning.

Recently, Hyatt acquired the 693-room Hyatt Regency Phoenix, AZ, for roughly $140 million, which was previously operated under a management agreement. In the third quarter of 2018, Hyatt decided to acquire Two Roads Hospitality for a base purchase price of $480 million. The acquisition is expected to close in the fourth quarter.

These acquisitions are part of Hyatt’s ongoing asset recycling program. In an effort to strengthen its financial flexibility and focus more on core operation, the company is also focusing on the sale of assets. The sale of assets is helping Hyatt grow through management and licensing arrangements, instead of direct ownership of selective assets. However, it continues to manage the properties post sale. Notably, a higher concentration of franchise fees reduces earnings volatility and provides a more stable growth profile.

Concerns

Hyatt has been facing declining sales in its owned and leased hotel segment for quite some time now. In the third quarter of 2018, revenues from Owned and Leased Hotels were $443 million, down 13.3% (12.9% on a constant currency) from the year-ago figure. Adjusted EBITDA of the segment also decreased 12.5% to $91 million. We believe that ongoing weakness in the segment is due to the company’s continual asset recycling.

Meanwhile, Hyatt is continuously facing intense competition from both large hotel chains like Marriott (MAR - Free Report) and Hilton (HLT - Free Report) as well as independent hospitality providers like Extended Stay America (STAY - Free Report) . Unless Hyatt counters these competitions with appropriate strategies, it may pose a concern to the company’s future profitability.

Hyatt currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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