Value Line has initiated coverage of Hilton Worldwide Holdings Inc. (HLT) in its flagship product, The Value Line Investment Survey. Hilton is one of the largest hotel chains in the world. As of June 30, 2013, it had 4,041 hotels, resorts, and timeshare properties comprising 665,667 rooms in 90 countries and territories. The company was founded in 1919, when Conrad Hilton purchased his first hotel in Cisco, Texas. Hilton is headquartered in McLean, Virginia.
The company maintains its properties in global gateway cities, including New York, London, Dubai, Tokyo, and Shanghai. As of June 20, 2013, it had roughly 147,000 employees in 90 countries and territories around the world. There are an additional 160,000 individuals working at its franchise locations that are not employed by Hilton. The company also has more than 38 million members in its customer loyalty program, Hilton HHonors.
Hilton has a portfolio of 10 brands, with the most recognizable one being its flagship, full-service Hilton Hotels & Resorts, which is considered the most recognized hotel brand in the world. The company also has other luxury brands, including Waldorf Astoria Hotels & Resorts and Conrad Hotels & Resorts, full-service hotels, including DoubleTree by Hilton and Embassy Suites Hotels, focused-service hotels, including Hilton Garden Inn, Hampton Inn, Homewood Suites by Hilton, and Home2 Suites by Hilton, and a timeshare brand, Hilton Grand Vacations.
Hilton operates its business through three segments: management and franchising, ownership, and timeshare. The first division is by far the largest, with 3,843 hotels and 596,765 rooms, whereby Hilton manages properties owned by third parties. It licenses its brands to franchisees. This group generates the highest margins and represents 98% of overall room growth since 2007, all with virtually no capital investment made by Hilton. The Ownership segment consists of 157 hotels with 62,498 rooms that it owns or leases. Finally, the timeshare group has 41 properties with 6,404 units, as the company sells timeshare intervals and operates timeshare resorts.
One of the company’s biggest strategic priorities has been to grow its global footprint, particularly in its management and franchise business. As of June 30, 2013, the company had the largest rooms pipeline in the lodging industry. In the past six years, it added 1,142 managed and franchised hotels to its portfolio, with 166,242 rooms, of which 29% were located outside of the United States. We think the company will continue this strategy for the foreseeable future.
Hilton maintains several competitive advantages. Its globally recognized, world-class brands have allowed it to command a 15% premium in average global revenue per available room compared to competitive properties in similar markets. The large number of properties, located throughout the globe, allow Hilton to serve its clients wherever they are. The global presence also reduces its exposure to business cycles and individual market disruptions.
The company faces several risk factors that can affect its business. It faces significant competition from multiple hospitality providers around the globe. These include other operators of luxury, full-service, hospitality chains with well-established and recognized brands, including Hyatt Hotels Corporation (H), Marriot International (MAR), Starwood Hotels (HOT), and Wyndham Worldwide (WYN), among others. It also competes against smaller hotel chains and independent, local hotel owners.
Another risk is that the company has a significant amount of debt. As of December 31, 2012, the company had close to $15.2 billion of long-term debt on its balance sheet, or more than 85% of total capital. As a result, the company requires that a substantial portion of its cash flows be used to pay interest.
All told, we think business prospects at Hilton remain firm. The company generated over $9 billion in revenue in 2012, along with solid earnings .While the amount of debt on the balance sheet is a concern, we think management will lower the balance over the coming quarters.
Subscribers interested in learning more about this hospitality company are advised to consult Value Line’s quarterly reports for Hilton, as well as any supplemental reports and relevant articles that may arise as important news comes to light.
At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.