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Hyatt's (H) Shares Gain 7.9% in 3 Months: Should You Hold?

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Hyatt Hotels Corporation (H - Free Report) is sincerely focusing on strategies that facilitate it to have an asset-light business, promising long-term growth and shareholder returns. However, intense competition, political uncertainties in key operating regions, and weakness in the owned and leased segment have been plaguing the company of late.

In the fourth quarter of 2018, earnings surpassed the Zacks Consensus Estimate for 12 straight quarters. Adjusted earnings of 62 cents per share outpaced the Zacks Consensus Estimate of 22 cents. In the prior-year quarter, the company reported earnings of 6 cents per share.

Backed by an impressive earnings trend, shares of Hyatt have gained 7.9% over the past three months, outperforming the S&P 500’s rally of 6.4%.

 

Factors Likely to Drive Growth

The company’s major growth building initiatives include maximization of the core business, integration of new growth platforms and efficient capital deployment.

Hyatt is strongly invested in strategies related to various acquisitions and divestitures that can drive growth. In 2017, the company acquired Miraval Group, which extended the Hyatt brand beyond traditional hotel stays into a wellness category that resonates well with high-end travelers.

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.

Meanwhile, the Hyatt Place and Hyatt House brands allow Hyatt to expand presence globally in a bid to further strengthen its fast-growing select service category. The company strongly believes that the opportunity for properties that offer selected services at a lower price than full-service hotels is particularly compelling in certain markets — including India, China and the Middle East. This is because there is a large and growing middle-class population in these markets along with a significant number of local business travelers.

Concerns

Hyatt has been facing declining sales in the owned and leased hotel segment for quite some time now. In the fourth quarter of 2018, revenues from Owned and Leased Hotels were $461 million, down 10.9% from the year-ago figure. Adjusted EBITDA for the segment also decreased 2.2% to $104 million. We believe that the ongoing weakness in the segment is due to the company’s continual asset recycling. While this may increase its franchise fees and reduce earnings volatility in the long run, short-term revenues are likely to be affected.

Meanwhile, the hotel industry is highly competitive as major hospitality chains, with well-established and recognized brands, are continuously expanding their global presence. Hyatt is continuously facing intense competition from large hotel chains like Marriott (MAR - Free Report) and Hilton (HLT - Free Report) . Smaller hospitality providers like Choice Hotels (CHH - Free Report) is also proliferating amid a competitive environment. Unless Hyatt counters these competitions with appropriate strategies, it may pose a concern for 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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