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Hilton Shares Up 57% YTD: Can the Bull Run Continue in 2020?

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Shares of Hilton Worldwide Holdings Inc. HLT have witnessed a sharp gain of 56.5% year to date, compared with the industry’s rally of 39.1%. We believe the upside can be attributed to improving economic indicators and expansion strategies, and its industry-leading loyalty program. However, increase in expenses and stiff competition remains a concern. Let’s delve deeper and analyze the factors influencing the stock.

Growth Drivers

Hilton continues to focus on unit expansion strategy to drive growth.  During third-quarter 2019, it opened 118 hotels. It also achieved net unit growth of 15,600 rooms, reflecting an improvement of roughly 7% from the prior-year quarter. During 2018, the company launched over 450 hotels, taking room count to more than 66,000, and achieved net unit growth of nearly 57,000 rooms, exhibiting an increase of 10% from the comparable year-ago period.

As of Sep 30, 2019, Hilton's development pipeline comprised nearly 2,530 hotels, with roughly 379,000 rooms throughout 111 countries and territories, including 35 countries and territories where it currently does not have any operational hotels. Moreover, 205,000 rooms in the development pipeline were located outside the United States, while 198,000 rooms were under construction. In 2019, the company is likely to inaugurate 100th Tru hotel, 500th Homewood Suites, 850th Hilton Garden Inn, and 2500th Hampton.

Hilton’s broad geographic diversity lowers the effect of volatility in individual markets. More than half of the company’s pipeline is located outside the United States. More than 30% of the pipeline is located in the Asia Pacific region, where demand has been high. Notably, growing middle-class population in China is also creating demand for hospitality services.

Hilton has created one of the largest loyalty programs, Hilton Honors. With more than 99 million members, this network created an extremely valuable asset for the company. In 2017, it added over 11 million members to the program. In fact, the loyalty program increased occupancy in 2018 by 20%. In the third quarter, Hilton Honors accounted for roughly 62% of system-wide occupancy, which was up 430 basis points year over year.



Higher operating expenses remain a headwind. In third-quarter 2019, operating expenses increased 4.8% from a year ago. Operating expenses are likely to rise in the coming quarters, which might limit the margins. Moreover, challenging economic conditions in some key operating regions and stiff competition remain woes.

As Hilton has outperformed the industry in a year, the stock’s valuation looks quite stretched. It has a trailing 12-month EV/EBITDA ratio of 18.06. On the contrary, the trailing 12-month EV/EBITDA ratio for the industry and S&P 500 is 16.4 and 12.01, respectively.

Hilton, which shares space with Hyatt Hotels Corporation (H - Free Report) , Marriott International, Inc. MAR and Choice Hotels International, Inc. CHH, currently has 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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