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Hilton (HLT) Shares Up 39% YTD: Will the Rally Continue?

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Hilton Worldwide Holdings Inc. (HLT - Free Report) is gaining momentum on the back of expansion strategies, RevPAR growth and robust loyalty program. These factors have helped the company post better-than-expected earnings for the fifth straight quarter. The stock has rallied 38.8% year to date compared with the industry’s rally of 23.3%. However, intense competition and cyclical nature of the industry are concerns.  

Let’s delve into the factors that substantiate the company’s Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


Catalysts Driving Growth

In a bid to maintain its position as the fastest-growing global hospitality company, Hilton continues to drive unit growth. During the third quarter of 2019, the company opened 118 new hotels. It also achieved net unit growth of 15,600 rooms, up nearly 7% from the prior-year quarter’s figure. During 2018, Hilton launched more than 450 hotels, taking the room count to more than 66,000 and achieved net unit growth of nearly 57,000 rooms from the year-ago period’s level.

As of Sep 30, 2019, Hilton's development pipeline comprised more than 2,530 hotels, with more than 379,000 rooms across 111 countries and territories. This included 35 countries and territories, where it currently does not have any running hotels. Moreover, 205,000 rooms in the development pipeline were located outside the United States and 198,000 rooms were under construction.

Hilton has created one of the largest loyalty programs, Hilton Honors. With nearly 90 million members, this network is an extremely valuable asset for the company. In 2017, it added more than 11 million members to the program. In 2018, more than 14 million members were added to Hilton Honors. In the meantime, innovations such as the Hilton Honors app continue to drive growth in the program. Apart from being the company’s fastest growing and lowest cost-distribution channel, the app — rolled out in December 2017 — also enables a differentiated customer experience. In fact, the loyalty program boosted occupancy in 2018 by 20%. The Honors now accounts for roughly 62% of system-wide occupancy, up 430 basis points for the third quarter of 2019.

The aforementioned efforts have helped the company to report better-than-expected earnings for the fifth straight quarter. For 2019, adjusted earnings are expected in the range of $3.78-$3.85 cents per share compared with $3.74-$3.84 projected earlier.

Major Concerns

The hotel industry is highly competitive, as major hospitality chains with well-established and recognized brands are continuously expanding global presence. Hilton is facing intense competition from both large hotel chains and smaller independent local hospitality providers. Increasingly, the company also faces competition from new channels of distribution in the travel industry.

As Hilton has outperformed the industry in the past year, the stock’s valuation looks quite stretched. The stock has a trailing 12-month EV/EBITDA ratio of 16.4, which is below the high level of 24.18 scaled in a year. On the contrary, the trailing 12-month P/E ratio for the industry and the S&P 500 is 14.21 and 11.15, respectively.

Also, operating expenses increased 4.8% from the year-ago quarter’s figure.

Key Picks

Some better-ranked stocks in the Zacks Consumer Discretionary sector are JAKKS Pacific, Inc (JAKK - Free Report) , Civeo Corporation (CVEO - Free Report) and Wyndham Hotels & Resorts, Inc (WH - Free Report) . JAKKS sports a Zacks Rank #1 (Strong Buy). Civeo and Wyndham Hotels & Resorts carry a Zacks Rank #2 (Buy).

JAKKS Pacific’s current-quarter earnings is expected to witness growth of 54.1%.

Civeo’s earnings surpassed estimates in three of the trailing four quarters, the average being 42.5%.

Wyndham Hotels & Resorts has three-five year expected earnings per share growth rate of 11.1%.

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